Standing Committee D

[Mr. Eric Illsley in the Chair]

Motion made, and Question proposed [15 June],
That—
(1) during proceedings on the Company Law Reform Bill [Lords] the Standing Committee shall (in addition to its first meeting at 9.00 a.m. on Thursday 15th June) meet—
(a) at 1.00 p.m. on Thursday 15th June;
(b) at 10.30 a.m. and 4.30 p.m. on Tuesday 20th June;
(c) at 9.00 a.m. and 1.00 p.m. on Thursday 22nd June;
(d) at 10.30 a.m. and 4.30 p.m. on Tuesday 27th June;
(e) at 9.00 a.m. and 1.00 p.m. on Thursday 29th June;
(f) at 10.30 a.m. and 4.30 p.m. on Tuesday 4th July;
(g) at 9.00 a.m. and 1.00 p.m. on Thursday 6th July;
(h) at 10.30 a.m. and 4.30 p.m. on Tuesday 11th July;
(i) at 9.00 a.m. and 1.00 p.m. on Thursday 13th July;
(2) the proceedings shall be taken in the following order: Clauses 1 to 137; Clauses 253 to 361; Clauses 604 to 641; Clauses 676 to 680; Clauses 694 to 777; Schedule 4; Clauses 778 to 795; Schedules 5 to 7; Clauses 796 to 806; Schedule 8; Clauses 807 to 812; Clauses 821 to 846; Schedule 10; Clauses 847 to 849; Schedule 11; Clauses 850 to 871; Schedule 12; Clauses 872 to 881; Schedule 13; Clauses 882 to 893; Schedule 14; Clauses 894 to 901; Schedule 15; Clauses 902 to 919; Clauses 921 to 925; Clauses 139 to 238; Schedule 1; Clauses 239 to 252; Clauses 362 to 529; Clauses 642 to 648; Schedule 2; Clauses 649 to 675; Schedule 3; Clauses 530 to 603; Clauses 681 to 693; Clause 138; new Clauses; new Schedules; Clauses 813 and 814; Schedule 9; Clauses 815 to 820; Clause 920; Schedule 16; remaining proceedings on the Bill;
(3) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 5.00 p.m. on Thursday 13th July.—[Margaret Hodge.]

Question again proposed.

Eric Illsley: We begin this morning by resuming the debate on the Government’s second programme motion. Debate may last for no more than the seven minutes remaining of the 30. I call the hon. Member for Solihull (Lorely Burt) to resume her speech.

Crispin Blunt: On a point of order, Mr. Illsley. Happily, the opportunity afforded to us by the break in the debate allowed me to consult “Erskine May” and pick up a point that I should have picked up when we began to discuss the second motion in the Programming Sub-Committee.
The motion is so substantially the same as that rejected by the Committee last week that it is my contention that it is out of order. Page 388 of “Erskine May”, which refers to matters that have already been decided during the same Session, says:
“Whether the second motion is substantially the same as the first is finally a matter for the judgment of the Chair.”
If we are considering a motion that is substantially the same as the first, I would contend that altering the time-out for the Committee by only one hour, as is self-evidently the case, means that this motion has already been substantially decided on by the Committee.
The point of substance here is that the Opposition are anxious that the Government and their draftsmen should have enough time to come forward with their amendments on the consolidation effect. We see the summer recess as an opportunity for that and we would like the out-date to be not 13 July, but 19 October.
That is the substantive point, but the technical and procedural one is self-evident—this is substantially the same motion. It has already been rejected by the Committee and cannot be put to us again.

Eric Illsley: I have listened to the hon. Gentleman’s point and, obviously, taken advice on the issue in the short time that I had available this morning. Given that we are now some 23 minutes into the 30-minute allocation of time for the programme motion and that the Programming Sub-Committee has already agreed that motion—albeit with some reservations on the part of the Opposition—I am not prepared to reverse the decision that I made to consider the programme motion.
In my view, this is not a procedural issue as such. It is a matter for debate as to whether the programme motion has substantially altered. I have made the ruling and will stick with it. We will continue with the motion as it stands.
On the substantive point of extending the out-date, we rehearsed that last Thursday in the Programming Sub-Committee and in the opening debate. Obviously, there may well be a further meeting of the Programming Sub-Committee, when the hon. Gentleman will again have the opportunity to press for further time for the Bill. At the moment, that is still in the hands of the usual channels. I hope that deals with his point.

Crispin Blunt: Further to that point of order, Mr. Illsley. I have to accept your ruling.

Lorely Burt: I am heartened by your words, Mr. Illsley, regarding the possible flexibility on further time. As I was saying in the previous sitting, we are disappointed, particularly in view of the fact that the Bill has been seven years in gestation, and four more days to get the consolidation right would have been helpful, not least for the civil servants, who need the time.

Margaret Hodge: This morning, we are anxious to proceed with the meat of the clauses that we must consider, and we in the Government are keen to reach agreement with other parties represented in Committee. If we can, we will have further discussions about additional time. If we can reach an understanding, we will return to the Committee with a fresh programme motion. It is probably best if we reach such an outstanding outside the Committee and get on with the Bill today.

Lorely Burt: I am grateful to the Minister for those words. She began by saying that we will be considering the Bill in a spirit of conciliation, so I hope that we can achieve that. Without further ado, I shall sit down and let us get on with our consideration.

Question put:—

The Committee divided: Ayes 10, Noes 8.

Question accordingly agreed to.

Clauses 1 to 7 ordered to stand part of the Bill.

Clause 8

Memorandum of association

Question proposed, That the clause stand part ofthe Bill.

Jonathan Djanogly: Following a somewhat unsatisfactory set of preliminaries, in which I sat in awe at the dexterity and skill of my hon. Friend the Member for Reigate (Mr. Blunt), we move on.
I welcome you to the Chair, Mr. Illsley, and look forward to receiving your help over the coming weeks, as well as that of Mr. Bercow. I want to make a few brief preliminary remarks, starting by declaring my interests as they appear in the register.
We welcome the Minister to her first Department of Trade and Industry Bill in her new role and look forward to working with her and other members of the Committee in the spirit of co-operation that she expressed last Thursday on behalf of the Government. 
For the largest Bill on record, we have assembled a crack team of my hon. Friends, boasting no fewer than four lawyers, of whom three have corporate experience; a corporate accountant; and a colleague with good experience as a company director. Their experience will, I am sure, greatly help our deliberations. We have put on record our concerns and noted the lack of understanding in relation to the programme motion, but short as time may therefore be, I am sure that we shall all end up somewhat the wiser at the end of the process.
The issues in the Bill are many. Perhaps they are mainly technical, but they are certainly important in establishing and improving the framework in which British companies can operate in a secure, efficient, low regulatory and competitive environment. So the journey begins, and I address first the question, which is clause 8 stand part.
The clause in effect replaces section 2 of the Companies Act 1985 and deals with the memorandum of association. That document, of course, deals with the company’s relationship with the outside world, as opposed to the articles of association, which regulate the relationship between the company, its members and its officers. The clause retains the requirement that individuals who wish to form a company must subscribe their names to the memorandum of association.
The memorandum now serves a more limited purpose and evidences the intention of the subscribers to the memorandum to form a company and to become members of that company on formation. In the case of a company that is to be limited by shares, the memorandum will also provide evidence of the members’ agreement to take at least one share each in the company.
In Grand Committee in the Lords, addressing a different amendment, Lord Sainsbury explained how that came about:
“It may be worth setting out what the memorandum of a company will be under the Bill. The Company Law Review looked very carefully at the question of the company’s constitution. It was keen to see the company’s internal rules as far as possible set out logically in one place and pointed out the potential for overlap under current arrangements between a company’s memorandum and its articles.
In taking forward those valuable suggestions, we wanted to do away with any scope for confusion between the memorandum and the articles, and introduce a clear distinction between the information in the memorandum, which will be in effect an historical snapshot, which, once provided, has no continuing relevance, and the constitution of the company properly-so-called, as contained essentially in its articles, which will be of real significance in the company’s life.”—[Official Report, House of Lords, 30 January 2006; Vol. 678, c. GC3-4.]
We agree with all that. The importance of the memorandum in the context of setting out a company’s relationship with outside parties and the once hallowed ultra vires implications have in practice been somewhat whittled down over the years by a mixture of precedent and statute. In reality, the wide use of non-specific object clauses means that confusion was setting in with the mainly older and specialist companies that retain specific objects. However, the Bill represents a halfway house.
We say that the mere formality of noting a corporation is fine, but ask why it needs a different document. That was partially addressed on Report in the Lords by Government amendment No. 3, which merged clause 9(4)(a)(i) and (ii) and reduced two filing documents to one. But why do we need a memorandum at all? Let us simply get rid of it and insert the information required by clause 8 in the first articles of association, which will always need to be filed at the same time in any event. That would bring further simplicity and be in the deregulatory spirit of the Bill.
I tabled an amendment to that effect—perhaps the poor drafting meant it could not be accepted—but notwithstanding that and accepting the fact that it was not accepted, I would be grateful to hear the Minister’s views on the content of the clause.

David Howarth: I welcome you, Mr. Illsley, to the Chair of this important and potentially long-running Committee, and I welcome the Minister to her new post. This must be the most strenuous first Bill that a Minister could have faced in a new job.
I echo the remarks of the hon. Gentleman, who said that the Bill not only clarifies many issues of company law, but is economically important. If such a Bill were to go wrong, it might lose companies millions of pounds in litigation. That is why I support what he said about clause 8.
The company law review has taken a long time, and it has taken up vast amounts of effort—not least the time of many of my erstwhile academic colleagues. Its purpose is to simplify company law. It is surprising that something as obvious as the difference between articles and memorandums of association has not been abolished. Multiplying various documents does not seem to be an obvious way to regulate company law. I therefore ask the Minister why the Government still think it important to have a number of separate documents on registration in respect of not only the clause, but other clauses in this part of the Bill.

Margaret Hodge: I welcome the general remarks made by those who speak for the Opposition parties. I look forward to getting on with the meat of this complex Bill.
It might not surprise the Committee that I asked precisely the same question about clause 8. I do not know whether my question was the result of my naivety in trying to get to grips with the matter or whether it was sensible. All I can do is offer the response given by my officials.
I was told that after discussions across the board with interested parties, and after the Law Commission review of company law, everyone felt that it was important to preserve the fundamental principle of company law—it has been part of our law for ever—that a company is an association. As a result, we decided to keep the memorandum. It is almost a historical document. Once set, it can never be amended. It is a record of the fact that people have come together in an association and agreed to form a company.
That principle provides the flexibility that I am told is the key feature that underpins company law. However, information on how functions and powers are allocated between directors and members of companies will in future be in not the memorandum, but the articles of association. Other information contained in the 1985-style memorandum will be provided in the form of a statement. To underpin that principle, which informs all company law, we have kept the memorandum, although its purpose will be very different.

Jonathan Djanogly: I hear what the Minister says, and I thank her for her response. She spoke about preserving and underpinning the principle, but if there is no practical or legal reason for it, why should not the Government reconsider the matter? She might like to have another look at it.
We support the principle of moving away from a memorandum. If we are going to go half way—this will come up in later amendments—it could be confusing to have half of it left over. Why not get rid of it and move on? I hear what the Minister says, but she might like to have a rethink before consideration on Report.

Margaret Hodge: What I will do is undertake to write to the hon. Gentleman and the hon. Member for Cambridge (David Howarth) expressing the legal reasons that have been given for maintaining the memorandum. If they are still unhappy with my explanation, we can return to the issue on Report.

Question put and agreed to.

Clause 8 ordered to stand part of the Bill.

Clause 9

Registration documents

Jonathan Djanogly: I beg to move amendment No. 2, in clause 9, page 4, line 16, leave out paragraph (b) and insert—
‘(b) the address in the United Kingdom where the registered office is to be situated,'.

Eric Illsley: With this it will be convenient to discuss amendment No. 64, in clause 86, page 36,line 29, after ‘office', insert ‘in the United Kingdom'.

Jonathan Djanogly: The clause replaces sections 2 and 10 of the 1985 Act, which refer exclusively to the delivery of a memorandum. The Bill changes how certain information is delivered: information that is set out in the memorandum will be provided to the registrar in accordance with the clause, which describes, among other things, the contents of an application for registration. It states that the application must contain a statement of the intended address of the company’s registered office and a copy of any proposed articles of association.
A probing Opposition amendment tabled in Grand Committee in the Lords was designed to find out why companies will need to state their country of incorporation, as an objective of the Bill is to extend company law to the whole of the UK. We feel that that point merits further discussion.
The application for registration, which is covered by amendment No. 2, and the resulting registered office, which is covered by amendment No. 64, must be in England, Wales, Scotland or Northern Ireland, as set out in part 6. In this globalised age, we are trying to simplify rules as much as possible to facilitate companies doing business. One reason for doing so is the certificate of incorporation, which will often need to be sent to overseas companies or used in legal opinions to validate the existence or good standing of a company.
As the clause stands, the certificate will say that a company is incorporated in England and Wales, in Scotland or in Northern Ireland. Frankly, that could be confusing for foreigners, who like to think that they are dealing with the United Kingdom. It would therefore be easier if the certificate said, “Registered in the United Kingdom.” That is what the amendments would achieve.
In Committee in the Lords, it was mentioned that non-company laws, such as insolvency laws, vary between the countries of the UK. In trying to move the Lords debate on a bit, I say to the Minister that insolvency processes can be started in any country, in the same way that a Scottish and French company could agree to a contract under English law. I am therefore not sure why it is necessary to have the country of incorporation on the certificate. I ask the Government to consider the issue.

Margaret Hodge: As the hon. Gentleman said, the matter was considered in Committee in the Lords. I appreciate the motivation that underpins the reconsidered amendment before us, because in a sense it seems overly bureaucratic to require that an application for registration must state whether the company’s office is to be registered in England and Wales, in Wales, in Scotland or in Northern Ireland.
As the hon. Gentleman said, the main reason for that is that there are three separate jurisdictions within the UK. He mentioned the need for clarity for the international interests that will be involved in the operation of UK companies, but I put the opposite point to him. For an international organisation or somebody from abroad who wishes to engage with a company in the UK, it will be more helpful to know which jurisdiction they will have to deal with rather than have to attempt to find out for themselves whether the jurisdiction is English and Welsh, Scottish or Northern Irish. That will bring clarity to the increasingly international nature of business dealings.

David Jones: Appreciating all that the Minister says about the jurisdictional points, is it not the case that England and Wales is a unified jurisdiction? Why, therefore, is it necessary to distinguish between England and Wales, and Wales? Admittedly, there are certain language requirements in Wales, but that is not a jurisdictional point. It is purely a procedural one.

Margaret Hodge: We have put that particular facility in place because it will give a company the opportunity to opt for the jurisdiction in which it wishes to operate. A company may want to take advantage of special provisions that might apply, for example, to Welsh companies. Taking the example of the Welsh language, a company may wish to use the Welsh equivalent of “limited” or “plc”, and provided it gives a translation, the company may then file documents in Welsh. If a company wishes to do that, I see no reason why we should remove or widen that concession.

David Jones: I appreciate that fully, but surely this is not a jurisdictional point. It is a matter of procedure and the filing of documents. It does not relate to jurisdiction because England and Wales are a unified jurisdiction.

Margaret Hodge: My notes say that it is a jurisdictional point, and if a company wishes to take advantage of the legal facilities that are available through incorporation in Wales, it can do so. If the legal facilities are Welsh facilities, we must spell that out in the place in which the company incorporates itself.
A company pleading insolvency could start insolvency litigation wherever it wished to do so. The hon. Member for Huntingdon (Mr. Djanogly) is right in principle, but there is a strong presumption in EU insolvency regulation that it is proper to start insolvency proceedings in the place of incorporation. He will also know, if he has read the House of Lords debate, that not only insolvency legislation, but property legislation and disputes over registers, differ between the legislative frameworks for the separate nations.

Justine Greening: I am slightly confused by the Minister’s comments about jurisdiction, mainly because, for example, in part 16, which deals with the auditor offence that is being introduced by the Government, there are separate clauses for England and Wales, for Northern Ireland and for Scotland, but no separate clause for Wales. I seek clarification as to whether the jurisdictional position is separate, or indeed joint, for England and Wales.

Margaret Hodge: Separate parts of legislation may have a Wales-only implication. I am referring in particular to the desire of a company to do business in the Welsh language. That might be particular to Wales. Other legislation will be relevant to companies where the jurisdiction in England and Wales is the same. I do not dispute that, but if there are clauses that are specific to Wales, we should not limit the capacity of a company that wishes to choose to incorporate in Wales to do so. That is all we are trying to do.
The requirement to state the jurisdiction in which the company’s registered office is situated might appear bureaucratic and purposeless, but in fact it is much needed. It is neither outmoded nor, if I may say so, trivial. If the amendment were adopted, other amendments would be needed to determine, when relevant, the law applicable in the part of the UK in which the registered office was located.
Amendment No. 64 is unnecessary because a company’s registered office must always be in the jurisdiction chosen when it was incorporated. There is no provision for the change of jurisdiction. A company’s registered office can be changed only by giving notice to the registrar, so it is impossible for the registered office to be moved elsewhere.
With that explanation and response to issues raised by hon. Members, I hope that the amendment will be withdrawn.

Jonathan Djanogly: My hon. Friend the Member for Clwyd, West (Mr. Jones) made an important point: we have to differentiate between jurisdiction and mechanics. He made that point well.
One of the better aspects of the Bill is the merger of Northern Ireland with England and Wales for the purposes of company law. That will save time and provide transparency. We thought that the amendment went down the same route. The Minister has a point: the proposed changes would require knock-on amendments. However, we do not believe that the amendment is any worse because of that. Nevertheless, I hear what she says, and I am pleased that we have had the debate. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 9 ordered to stand part of the Bill.

Clause 10

Statement of capital and initial shareholdings

Jonathan Djanogly: I beg to move amendment No. 3, in clause 10, page 5, line 2, leave out subsection (1) and insert—
‘(1) The articles of association of a company on its incorporation shall contain a statement, which must comply with this section.'.
The clause relates to sections 2(5)(a) and (c), 6 and (6A) of the Companies Act 1985 and effectively accepts a recommendation by the company law review to abolish the requirement on a company to have an authorised share capital. In future, the memorandum will contain only a limited amount of information on a company’s founder members—the subscribers to the memorandum. Information about the shares subscribed for by them, which is currently set out in the memorandum itself, will in future be provided to the registrar in the form of two statements made inthe application for registration—one of initial shareholders, and one of share capital.
The statement of initial shareholdings must contain the names and addresses of the subscribers to the memorandum. In all cases, the requirement is for a contact address. House of Lords amendments took issue over the point at which names and addresses of initial shareholders of a company should first be published. The Bill required that to be at the point of formation, but the amendments would require it to be at the time of the first annual return.
My noble Friends argued that it was better to have a later declaration when it was more meaningful than one at the formation of the company, as the Government argued, when individuals were often essentially nominees. We do not intend to review that debate. However, to return to an earlier point, why is there the need for a separate form? We think that the Bill should be about limiting forms to the bare minimum.
In any event, newly formed companies will often include in their articles details of the share capital on incorporation. So making that compulsory and removing the form would be uncontroversial. That form might be linked to the implementation of the EU second company law directive 77/91/EC, but I do not see why that could not be complied with by using the articles to provide the information, rather than another form.

Margaret Hodge: It is important that we consider clause 10 against the background of other provisions, particularly those in part 19 on share capital, which requires certain types of company to provide an updated statement of subscribed capital whenever the subscribed capital changes. The statement required in clause 10 is essentially a snapshot taken at the time of the formation of the company, as the hon. Gentleman said. It is likely to be superseded over time by further statements of the same sort—for example, if new shares are allotted or the company’s share capital is reorganised. The question then becomes where those statements should appear. The choice seems to be among the memorandum, the articles or, as the Bill provides, a separate statement. I shall explain why we believe that a separate statement is the right approach.
As we have discussed, the memorandum will contain nothing other than the historical information. As the statement of capital will change over time, that does not appear to be the appropriate place in which to put the statement. On the face of it, as the hon. Gentleman said, using the articles makes more sense. I can see why he is attracted to the logic of that argument. Articles contain information of ongoing relevance about the company and may, on occasion, need to be updated.
However, there is a requirement in the law that whenever any element of the articles is changed, a full new and updated copy of the articles has to be produced and filed with Companies House. That requirement is sensible, ensuring that those who need to consult the articles will never need to look in more than one place to understand all the provisions contained in them, but the implications could be onerous if the statement of capital was involved. Some companies may well change their subscribed capital frequently, and certainly more frequently than we would expect them to change other elements of their articles. It would be excessive to require them to produce a fully revised new set of articles every time they changed their share capital.
We have taken a pragmatic approach. The Bill provides for the statement to be an independent element of information that will appear separately on the Companies House register and which will be easier to identify by searchers of the register.

Jonathan Djanogly: I agree with the Minister. On an ongoing basis, it would be very onerous for most companies to have to refile their articles every time they changed their share capital, although manylarge companies do exactly that. However, I thought that we were discussing the statement of initial shareholdings—the shareholdings that the company is incorporated with—rather than the position on an ongoing basis. I appreciate that there might have to be a form on an ongoing basis, but that should not have to be the case on day one.

Margaret Hodge: If the statement of initial shareholdings were incorporated into the articles of association, which I think is what the hon. Gentleman is talking about, it would become an integral part of the articles of association, so any change to them would mean that all the articles would have to be changed. We propose a separate statement.

Jonathan Djanogly: The practice of most companies that put their initial share capital into the articles is that the first time they change them, they remove it at that point, so rather than being an ongoing obligation, it would probably be a one-off when the company was recapitalised for the first time.

Margaret Hodge: I think that that would of itself become extremely bureaucratic and the statement of share capital could well be out of date on day one after the company was incorporated. Having a separate statement from the beginning is clearer. There may be variants of view on that, but we believe that it will be simpler to update the statement if it is separate, not least if the company chooses to use electronic means to do so. I hope that, having had that little exchange, the hon. Gentleman will withdraw the amendment.

Jonathan Djanogly: I hear what the Minister says and this is not the sort of provision that anyone should want to die in a ditch over. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 10 ordered to stand part of the Bill.

Clause 11

Statement of guarantee

Margaret Hodge: I beg to move amendment No. 75, in clause 11, page 5, line 30, leave out from ‘contain' to end of line 31 and insert
‘such information as may be prescribed for the purpose of identifying the subscribers to the memorandum of association'.
The amendment arises from a debate that took place on Report in another place, when the Bill was amended to remove the requirement for subscribers’ names and addresses and the statement of capital and initial shareholdings. That requirement was replaced with a power that would enable the Secretary of State, in regulations that can be made under the Bill, to prescribe the types of information that are to be provided in the statement of capital and initial shareholdings for the purpose of identifying the subscribers to the memorandum of companies to be formed with share capital. Consistent with that approach taken to companies that are to have a share capital on formation, the amendment carries forward the principle that the Secretary of State should be able to specify what is required for the purposes of identifying the subscribers, where it is proposed that a company will be formed as a company limited by guarantee.
As we mentioned in the other place, we envisage that the power will be used initially to continue to require the names and addresses of the subscribers to be provided. Both the Serious Fraud Office and the companies investigation branch have confirmed to us that that information is useful in combating fraud, and we see no reason not to retain it as a requirement for the time being. The address, as now, does not need to be a residential address; a contact address is sufficient. The power will provide flexibility for the future if, for example, it is concluded that the requirement for subscribers’ addresses is no longer necessary. The power could be used to remove that requirement or to provide for an alternative or for better information pertaining to a subscriber’s identity.

Jonathan Djanogly: The amendment seems to us to be well considered, not least in the context of avoiding exposure to extremists, which we shall discuss in much more detail later on, and it has our support.

Amendment agreed to.

Clause 11, as amended, ordered to stand part ofthe Bill.

Clause 12

Statement of proposed officers

Jonathan Djanogly: I beg to move amendment No. 4, in clause 12, page 6, line 1, leave out from beginning to second ‘the’.

Eric Illsley: With this it will be convenient to discuss the following:
Amendment No. 47, in clause 12, page 6, line 1,leave out
‘to be a public company'
and insert
‘required or proposes to have a company secretary'.
Government amendments Nos. 76 to 79 and 93.
Amendment No. 51, in clause 44, page 18, line 34, leave out
‘In the case of a public company'.
Amendment No. 52, in clause 44, page 18, line 34, after ‘executed', insert ‘by a company'.
Amendment No. 53, in clause 44, page 18, line 36, at end insert
‘who shall not be the same person'.
Government amendments Nos. 94 to 96 and 100.
Amendment No. 56, in clause 48, page 20, line 5, after ‘director', insert ‘or secretary'.
Government amendments Nos. 112 and 113
Government new clause 14—Authorised signatories.
Government new clause 15—Appointment of authorised signatories.
Government new clause 16—Minimum age for appointment as authorised signatory.
Government new clause 17—Register of authorised signatories.
Government new clause 18—Particulars to be registered.
Government new clause 19—Particulars to be registered: power to make regulations.
Government new clause 20—Duty to notify registrar of changes.
Government amendment No. 114

Jonathan Djanogly: It looks like the Government have something to say on this clause as well, but I shall kick off. The clause replaces section 10 of the 1985 Act. In so far as it coincides with the question of authorised signatories, I note that the Chairman has chosen also to include amendments to clause 44.
There are two basic regulatory changes to consider. First, as recommended by the CLR, once the legislation is in force all directors will have the option of having their home addresses kept on a separate record to which access is restricted. To benefit from that option, a director will have to provide a service address for the public record. We will discuss that in detail under part 10.
Secondly, as recommended by the CLR, the Bill reflects the abolition of the requirement for private companies to have a secretary. We will debate that in further detail when we get to part 12. There is a consequential issue concerning company secretaries—I repeat that this will be debated in greater detail later—namely whether, if a private company decides to have a non-statutory company secretary, it should then have to notify particulars. Lord Sainsbury said emphatically in the Lords Grand Committee that it should not. On Report in the Lords, Lord Hodgson said:
‘“Our position on this is simple—where a company chooses to have a secretary, that secretary should be fully empowered to exercise all the functions and bear all the responsibilities of a legally required secretary.”—[Official Report, House of Lords,9 May 2006; Vol. 681, c. 782.]

I restate that as our position today. As Lord Hodgson said on Third Reading:
“The lack of any requirement for the registration of secretaries will leave those that still exist in limbo, with no official recognition of their status.”—[Official Report, House of Lords, 23 May 2006; Vol. 682, c. 710.]
Lord Sainsbury said that the only time third parties should need to know the information about a secretary is when executing documents. Technically, the Minister may have been right, although practically—particularly for larger companies and for corporate governance purposes—we do not think that he was. That will be the debate on part 12.
On Third Reading in the Lords, Lord Sainsbury addressed the question of secretaries and others signing documents in detail. He said that the Government would consult on four issues. He stated:
“There are four questions that need to be addressed with this group of amendments. First, who should be able to execute documents for a company? Secondly, and related to the first, if private companies appoint a secretary, should that secretary be able to participate in the execution of documents for the company? Thirdly, should the details of any secretary voluntarily appointed by a private company be on the public record? Fourthly, and finally, if private companies appoint a secretary, should the directors be under an express duty, imposed by the Bill, to secure that the secretary is a person who appears to them to have the requisite knowledge and experience to discharge the functions of a secretary?” —[Official Report, House of Lords,23 May 2006; Vol. 682, c. 711.]
Those were fair questions and we looked forward to hearing the response to the results of the consultation. Unfortunately, it seems that the Government decided not to answer those questions or, rather, by coming out with their proposal for authorised signatories, said that they were all answered. We do not think that that is adequate. I know that the Government have been under time pressure during the consultation but20 complicated Government amendments were filed a few days ago and we have not been able to consult on them. So, as far as we are concerned, it has not been a good start to consideration of this clause.
However, it is clear that the Government are moving on from the concept of the company secretary to that of the authorised signatory. We believe that there is room for both. Having made that clear, and on the basis that we want to return to this issue when considering part 12, let me move on to the provisions relating to authorised signatories.
I note the position of the Institute of Chartered Secretaries and Administrators, which put a strong case in its note of 15 June 2006. It said:
“The proposed authorised signatory regime may provide further flexibility to some companies, but this new regime will not suit all private companies. The authorised signatory, as proposed in the draft clauses from the DTI, is a different beast to a secretary and can sign any document on behalf of the company. This contrasts with the secretary’s automatic powers, which beyond their statutory powers, have been established in case law to be limited to signing documents of an administrative nature.”
The Secretary of State made clear on Second Reading that he supports the optional regime, but he and many others may not have realised that all the statutory power of a secretary of a private company has been completely stripped away by the Company Law Reform Bill as drafted. Where the board of a private company wants the secretary to continue in his position post the enactment of the Bill, it will find that all the secretary’s automatic statutory powers under the 1985 Act to certify and execute documents and file returns to Companies House will no longer exist. For any of the 2 million private companies that find their secretary useful and want to continue to employ such a person, there will be the confusing burden of having to set up appropriate authorisations to try to mimic the current statutory powers that are well understood. The new burden will bring complication, not simplification. A secretary remains an officer of the company, so his statutory powers should be clear along with his liabilities.
Should such a company want to appoint a secretary, there is no provision for it to register the appointment at Companies House. Registration is essential, as it provides an easy authorisation check for third parties dealing with the secretary. It is common sense that the automatic powers under the 1985 Act should continue to apply to those secretaries who continue in their position, and it should be possible to register future secretary appointments at Companies House. It is not difficult to amend the Bill to capture the idea that private companies have a choice as to whether to have a secretary, and that the existing powers will apply if they do have one. It will be far more burdensome and confusing for companies if the Bill is left as drafted.
These are important points. In fact, the more I consider the subject, the more I wonder why we need an either/or approach. Why not retain the secretary regime for those companies that have them, which admittedly will be far fewer after the Bill comes into effect, but also put in place an authorised signatory regime?
Having said that, we do not have a problem in principle with the concept of the new authorising signatory regime per se, but given the lack of time—those comments were received in the brief time since the amendments were tabled—I must reserve our right to come back on the detail of the provisions on Report. I look forward to hearing the Minister’s explanation of how the separate register and execution powers will work in practice.

Lorely Burt: I preface my questions with an admission that I am not a lawyer—far from it—and as my hon. Friend the Member for Cambridge has been unavoidably called away, I ask for the patience of the Committee. I shall do my best to put the points that we wish to make.
We want to understand the difference that amendments Nos. 4 and 47 would make to what has been proposed. The intention appears to be to set up the possibility that the distinction between companies required to have company secretaries and those not so required should rest on something other than the fact that the company is or is not a public company. Our position is that it is right to remove the requirement from private companies, but there may be an argument from other parties that very large companies should have a secretary even if they are private companies.
The Government amendments, including the new clauses, appear to create a new authorised signature regime for companies, presumably in response to the complaint that removing the need for company secretaries will lead to confusion about who is authorised to sign documents on behalf of the company. In effect, they will allow companies to say that people other than directors are also authorised and to put those names on a register that other people can see. We are not entirely convinced that this is technically necessary, but people may genuinely be confused by the new situation.
Amendment No. 51, which would amend clause 44, continues the company secretary debate, but it seems to conflict with clause 12. Amendment No. 52, which could be a drafting amendment, would make it clear that a document is associated with the company and not anyone else. We want to understand why that is important if a single director could sign in the presence of a witness.

Vera Baird: The hon. Gentleman argued that there will be some difficulty for companies if the first secretary of a private company is not included in the statement of proposed officers. There is a long debate to come about that. However, as his amendment is consequential to later amendments relating both to the execution of documents and to private company secretaries, I shall start by addressing who can act for a company in the execution of documents. I shall pause there, as some specific points have been made.
First, let me be glad that the hon. Gentleman has no problem with the concept of authorised signatures, except in the caveat that he has put forward, and apparently neither does the hon. Lady, who merely asked whether it would be confusing. In fact, it is probably a reasonably clear provision. Of the questions raised by Lord Sainsbury, the three that are relevant were probably all answered. Who can execute documents? If there is a company secretary in a private company, there is case law to say that they can sign documents relating to administrative matters, so that presents no problem. If the private company makes their company secretary an authorised signatory, of course they can sign in that capacity. The third question was whether the company secretary has to go on record, to which the answer is yes if they are an authorised signatory. I hope that is clear. I do not think that the last point was relevant.

Jonathan Djanogly: Looking at the remarks of Lord Sainsbury at Grand Committee stage, most people would probably think that he wanted to see how the concept of the company secretary could be built in, whereas what came out of the mill, so to speak, was the total cutting-out of company secretaries. That is the point that I was trying to make.

Vera Baird: I think that is probably an interesting item for the later debate, says she who is hopefully not conducting it. Who may enter into a contract on behalf of the company is really entirely a matter for each company’s internal organisation, and it is wholly a matter for the company how, and by whom, its official seal is affixed for the purposes of contracts.
The ability to execute documents by the signature of two directors, or one director and a secretary has been available since 1989. The nub is the nature of the alternative proposed in clause 44 to affixing the seal for execution of documents—that is, signature by two directors, or by one and a witness. The point of the provision was to grant new flexibility and allow a signature by a single director—that, I think, was how it went into the Lords—as long as that was duly witnessed, with no restriction on who may witness it. However, it has been pointed out—we have taken this on board—that that reduces flexibility for private companies in certain, limited circumstances since the witness and signatory have to be present together whereas the directors, or the director and secretary, may sign separately.
As nobody wants to restrict flexibility, and as the whole point is to improve it, we have considered the matter further. By discussing it with stakeholders—in particular, the City of London Law Society—we discovered that some public companies would value having the freedom to authorise who can sign on their behalf, just as they value their existing freedom to authorise who can put their seal on. That freedom would be of particular benefit to private companies that have only one director. Hence, we have gone further to introduce more flexibility.
The Government amendments will enable any company to appoint any number of people to execute documents of any description on its behalf. Directors, and in the case of public companies their secretaries, will automatically be authorised signatories by virtue of their office, although the company can appoint more such signatories if it wants. For all companies executing deeds, the alternative to affixing their seal will be either by the signature of two authorised signatories, or by one in the presence of a witness. It is important that third parties know whether someone is authorised to sign, which may be relevant long after the event.
As for directors, the Bill already requires a company to keep a public register of its directors and file the information with the registrar. The same is the case with secretaries of public companies. Government amendments Nos. 76 to 78 and Government new clauses 17 to 20 ensure that the name and address of any authorised signatory is similarly on the public record at formation and thereafter.

James Brokenshire: I note that the Minister said that it was important for third parties to know with whom they are dealing, which obviously underpins the concept of authorised signatories. I briefly return to the issue of company secretaries and private companies. She said that case law states that company secretaries could sign administrative documents. Does she accept that third parties not familiar with case law may want something that is more codified to assure third parties that a company secretary in a private company is duly authorised?

Vera Baird: If the company secretary of a private company is an authorised signatory, it will be on the record.

James Brokenshire: And if not?

Vera Baird: Then the hon. Gentleman probably makes a good point, and I shall reflect upon it.
The amendments are intended to enable a company to appoint any number of people to execute documents. I am sorry to go back to this point, but it is important to make it clear to third parties who can exercise that function: authorised signatories will have to go on to the public record on formation of a company and thereafter as they are appointed. The requirements of the record will, I think, be the same as for public company secretaries, except apparently it will not be necessary for a public company secretary to be 16—although I doubt whether that will be relevant terribly often.
The proposals have real attractions both to private and public companies. Several public companies have made it clear they would find it useful to have such a facility, especially those that have to execute lots of documents—for instance, banks issuing powers of attorney. It will be possible for a private company appointing an individual to the office of secretary to appoint the same individual as an authorised signatory, but that would be entirely up to the company. On the other hand, the abolition of the requirement to have a company secretary is likely to lead to some private companies finding other ways to meet their administrative needs.
In recommending abolition of the requirement to appoint a company secretary, the company law review argued that it would give greater flexibility. A few large companies will of course continue to have secretaries; and it is likely that such companies will use the facility provided by this group of amendments to give the secretary the authority to execute documents, so secretaries would have that authority as they now do under the Act.
However, about 1 million private companies have only one director and a secretary, and more than half of them have fewer than five shareholders. Such companies are likely to use the flexibility provided by the Bill in other ways. It is possible that people would appoint secretaries only to cover peak periods, and in such situations they might not want them to be able to execute documents. Others might divide the function between two or more people, who may or may not be directors; or the directors might appoint a secretary but not want that person to be an authorised signatory. We want to give all companies the maximum freedom as to who can execute documents. Such flexibility will be useful.
I do not know if this answers the hon. Member for Hornchurch (James Brokenshire), but we are not codifying who can sign. As an agent, that would be an immense and unnecessary task. Companies enter into transactions at every level every day, but we are talking about formal contracts, and the case law relates to agencies. Does that help?

James Brokenshire: I was seeking some transparency and clarity about the role of the company secretary. If there is case law—if there is some uncertainty as to whether the secretary of a private company can sign a formal contractual document—it is important to have clarity about the continuing role of the secretary. We need to know whether such people are duly authorised to sign formal documents without the need to go through the formality of becoming an authorised signatory, and I am not sure that the Minister has addressed that point.

Vera Baird: I do not think the hon. Gentleman needs to worry. It is plain that a company secretary can sign because, under the new system, the signature will be tendered on the basis that the person is an authorised signatory. I shall try to develop the argument, as the hon. Gentleman is obviously not entirely happy.
Who may sign on behalf of a company is a matter for the company. Who may sign as the company—that is what we are dealing with—is limited by statute and details will have to be on the record. A person can sign as the company only if he is an authorised signature; it is for the company to decide whether a person can sign day by day on its behalf.

James Brokenshire: Perhaps we can debate the subject more fully when we come to part 12. A private company that has a company secretary is now able to execute documents, under company seal or executed as deeds, through the company director and the company secretary. Existing private limited companies with secretaries who wish to retain them will clearly face a further administrative burden inasmuch as the existing secretary will now formally have to be appointed as an authorised signatory. We are trying to raise such issues, and I shall develop that point in more formal and further detail when we reach part 12.

Vera Baird: I am grateful to the hon. Gentleman for making it clear to what he was referring, but the increased flexibility in the provisions overwhelmingly outweighs the need to appoint a company secretary as an authorised signatory. The hon. Gentleman has talked about formalities as if there is a great procedure to go through, but I do not think so. Existing company secretaries of private companies might or might not be allowed to be deemed authorised signatories by virtue of their office—we are still considering that—but new company secretaries and new private companies will clearly follow the new regime of authorised signatories. Transitional provisions are still a little up in the air, but I hope that that satisfies the hon. Gentleman that we are still considering the matter.
In view of the maximum flexibility in the amendments, I hope that the hon. Gentleman will withdraw his amendments and support those tabled by the Government.

Jonathan Djanogly: I said that we would need to look more closely at the mechanics of the provisions—that will obviously be important—rather than at the execution of the provisions per se.
As regards company secretaries, we are concerned that the provision could give rein to confusion on the part of companies and the people who deal with them. Until the new system beds down, there will be a dangerous transitional stage as company secretaries will look to change companies’ articles of association, as standard inserts will presumably be prepared to go into articles to put back in place the powers that were there under statute and under constitutions, and as different companies will have different ways of doing things. The process of passing resolutions and changing articles is regulatory by nature and will involve costs to companies, as well as time.
I was certainly interested to hear that the Minister would consider the issue of existing company secretaries. I am sure that they will be pleased to hear that, but from a rational point of view I am not entirely sure that to differentiate between existing company directors and training company directors is the right route to follow.

Margaret Hodge: The hon. Gentleman alludes to a series of issues that are part of the transition we shall have to reflect on as the Bill moves towards becoming an Act. I hope he accepts our assurance that we will be putting out regulations for the transitional arrangements. There will be extensive consultation on the regulations, which will not come into force until October 2007. We appreciate, as he does, that there is a degree of complexity in getting the transition right for existing companies. I hope he accepts that there will be extensive consultation on our part with all interested parties.

Jonathan Djanogly: I am certainly pleased to hear that there will be extensive consultation. From what I saw in the Lords Committee stage, and even through to today, with Government amendments being put in regularly with little notice to the Opposition, there needs to be a lot more thought.

Margaret Hodge: Any amendments—I am the first to admit this, having taken other Bills through the House—by Government at a late stage are always resisted by Ministers unless they are necessary. [Interruption.] No, unless they are absolutely essential and should have been thought through before.
Today’s Government amendments come out of debate with people in the legal profession and the associations we have consulted, as well as out of debate in the House of Lords. That has been part of the inclusive way in which we have tried to develop the Bill, and the hon. Gentleman should welcome that, but instead he laughed. When I have led on other Bills, I have been resistant to amendments because it would have been bad for the Government to accept them. In this instance, we are responding to legitimate concerns raised either in the debates elsewhere or by professional associations, and the hon. Gentleman should welcome that. The Government amendments reflect the debate elsewhere.

Jonathan Djanogly: I hear the Minister’s explanation, but the proposals are not new. They went through the CLR and were consulted on for six or seven years in one way or another. Here we are seven years later and I think—the Minister will tell me if I get this wrong—that the amendments were tabled last week. To say that we have had a good period to review them is wrong.

Margaret Hodge: Is the hon. Gentleman therefore suggesting that the idea that we should not impose on private companies the obligation to have a company secretary has been disputed for the last seven or eight years, or that there has not been consensus? Does he not accept that that deregulatory move has been welcomed warmly by most of those with an interest, which was the original drive behind the proposal?

Jonathan Djanogly: Warmly welcomed or not—and I shall not pre-empt a debate on part 12—the fact remains that the knock-on effects of policy decisions such as those we are debating on the signing of documents have not been thought through.
Margaret Hodgeindicated dissent.

Jonathan Djanogly: I am afraid that that is the implication of the amendments having been produced in the past few days. We have concerns, and in the past two days I have received about 30 letters from concerned company secretaries. I feel it fair and just that these concerns be put.

Vera Baird: I hope that the hon. Gentleman does not feel that we are ganging up on him. We are keen to respond to problems that have arisen from measures that we saw as increasing flexibility, and to meet the concerns that have been expressed by increasing that flexibility even more. The thrust of the hon. Gentleman’s earlier argument was the difficulty of moving from a current situation in which duties are set out clearly to a new flexibility, and whether the transitional period will be confusing, particularly when mixed with any confusion that might arise from the provisions before us. However, the provisions are clear: a company may appoint anybody it wishes to be an authorised signatory and they need only be registered. That cannot be something to complain about. My right hon. Friend has made it clear that because there will be an awkward transition period, we will consult heavily as we go along. The hon. Gentleman should be content.

Jonathan Djanogly: I wish I could say that I was content. I am not, although I am grateful for the pledge of further consultation, which will be necessary. Company secretaries are valued and useful people, and we do not believe that they have been treated appropriately by the Government. Their views must be given a full airing, and we will make that point later in our proceedings. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 76, in clause 12, page 6,line 3, at end insert—
‘( ) any person who is to be appointed as an authorised signatory of the company.'.
No. 77, in clause 12, page 6, line 4, leave out from ‘stated' to end of line 7 and insert ‘—
( ) in the case of a director, in the company's register of directors and register of directors' residential addresses (see sections 147 to 151);
( ) in the case of a secretary of a public company, in the company's register of secretaries (see sections 260 to 262);
( ) in the case of a person appointed as an authorised signatory, in the company's register of authorised signatories (see sections (Register of authorised signatories) to (Particulars to be registered: power to make regulations).'.
No. 78, in clause 12, page 6, line 9, after ‘secretaries,' insert
‘or as an authorised signatory,'.—[Vera Baird.]

Clause 12, as amended, ordered to stand part ofthe Bill.

Clause 13

statement of compliance

Jonathan Djanogly: I beg to move amendment No. 15, in clause 31, page 12, line 19, after ‘a', insert ‘public'.
Clause 13 deals with the statement of compliance. It relates to section 12(3) and (3)A of the Companies Act 1985. Based on recommendations of the CLR, the current requirement of a statutory declaration or a chronic statement here and elsewhere in the Bill is replaced by a requirement to make a statement of compliance. This statement does not need to be witnessed and may be made on paper or in electronic form. It will be for the registrar’s rules under clause 75 to specify who makes a statement and its form. Will the Minister advise us whether her Department has now considered the form of the statement or whether that will follow?
My probing amendment provides for retaining the use of the statutory declaration. Our concern here is related to impersonation and the growing problem of identity theft. There is a growing problem of forms 288 being sent in by crooked individuals to change the directors of registered companies. They may do that in their own name or under a pseudonym or, often, the name of a dead individual. These so-called directors then change the registered office to one of their own choice so that the company has therefore been hijacked to some extent, and typically they enter into contracts using the false details.
The safest stage of the registration process at the moment is the company formation stage. That is because at that moment one has to go in front of a solicitor or possibly a commissioner for oaths and make a statutory declaration. Will the safety that we have within the system now disappear? I assume that it will. How do the Government intend to make sure that we retain this element of safety without the statutory declaration, not least in view of the additional risks of accepting details online? This is a probing amendment, I hasten to add. I am generally in favour of e-commerce and using the internet, but we need to appreciate that there are security concerns here that they are being misused. This is not me suggesting that a problem will happen; it is a growing problem and we need to have a remedy in place by the time the Bill comes into force.

Margaret Hodge: The hon. Gentleman rightly said that the statutory declaration and the electronic statement will be replaced by this new statement of compliance. He asked me whether the form of the statement had yet been published. It is not yet published; it will be for the registrar’s rules, although he will understand that the rules will not require the presence of the solicitor or a commissioner of oaths. They are likely to allow greater flexibility as to the persons who are able to make the statement on behalf of the company: for example, we could have such professionals as accountants making such a statement on behalf of the company.

Jonathan Djanogly: I may have missed something here. Is the Minister saying that someone will still have to give some kind of compliance statement on the form, even though it does not take the form of a statutory declaration?

Margaret Hodge: Yes.
The hon. Gentleman then raised the issue of fraud. Clearly it is a problem that we all constantly have to grapple with, but I am not convinced that the hon. Gentleman’s answer will really help. The registrar’s rules will enable provision to be made for authentication, and we may, for example, be moving towards a unique identifier. Breaches will continue to be a serious matter, but there are various clauses in the Bill to deal with the issue. Making a false statutory declaration would be a matter for the law of perjury, while making a false electronic statement would be an offence. Under clause 764, a false statement of compliance will become a false statement, and the clause sets out the penalties on conviction, including fines and custodial sentences. Although the hon. Gentleman is right to allude to a problem, therefore, I am not sure that the answer lies in maintaining the statutory declaration.

Shailesh Vara: Although the Minister is right to say that there are penalties for those who use a wrong identity, would she none the less agree that the idea in effecting the relevant clauses is not to punish people but to prevent the offences from being committed in the first place? That is where our argument is coming from: we want to avoid the offences, rather than to prosecute later on.

Margaret Hodge: Clearly, prevention is the better route, and we all want to go down it. As has been said, we hope that the existence of the penalties will become a disincentive to breaking the rules. I am simply not convinced that we shall be better able to prevent fraud if we have a witnessed statutory declaration. That was all I was saying, although I entirely accept that we would rather prevent fraud, and we need constantly to look at the development of electronic communication to see how we can improve facilities for doing so. The issue regularly comes across my desk in relation to other parts of my portfolio.

Jonathan Djanogly: I am a little confused. As I understand it, there will be a declaration from someone else, rather than a statutory declaration. Presumably, there will be a wider pool of people who can give a declaration, so the process will become easier, and there will be less red tape. Conceptually, that is fine, but if the idea is also to move online, will the Minister explain how that ties in with someone—albeit someone else—giving a declaration? Will the fact that it has been given be declared online?

Margaret Hodge: I think that the answer is yes. What I was trying to say was that the current developments in electronic communication support improvements to ensure that the statement is not given fraudulently or by an impostor. I am also told that, currently, somebody can give a statement online that what someone else has declared online is already the position, and we are not changing that.
It might help the hon. Gentleman if I say two things. First, we are trying to widen the range of people who can give the statutory declaration. Secondly, two declarations have to be made at present. One is made by the first director, or secretary, of a company or by a solicitor engaged on the formation of a company, and it must be made or witnessed before a solicitor or commissioner of oaths. In other words, it cannot simply be made by the person or persons forming the company, and the statutory declaration cannot, seemingly, be made electronically. That is why the current Act explicitly provides for an electronic statement as an alternative. Currently, there are two different sets of requirements, which depend on the form of communication that is adopted.
Under clause 721 in part 29, which relates to the registrar of companies, it will be for the registrar to determine the form of the new statement of compliance and issues such as who can authenticate it. Such matters may be set out in the registrar’s rules under clause 770. In other words, the details will, for the most part, be matters for rules established by the registrar of companies.
I think I have covered most of the points raised, and I hope that I have given sufficient assurances for the hon. Gentleman to feel able to withdraw his amendment.

Jonathan Djanogly: I thank my hon. Friend the Member for North-West Cambridgeshire (Mr. Vara) for pointing out that prevention is as important as penalties, if not more so. That is a central theme of the clauses dealing with the filing of documents. I have no doubt that the mechanics of the use of electronic filing will make the area more risky and more open to abuse, so the chance of fraud will be increased. The right hon. Lady said that a person can currently file online. I think that that is true, but in practice it probably applies to a small number of company formation agents. I have the feeling that the proposals are intended to broaden the use of electronic filing. That is not necessarily a wrong thing to do, but it will increase the risk of abuse.

Jim Cousins: Can the hon. Gentleman tell the Committee whether the abuses to which he is drawing our attention are widespread, excepting, of course, that he anticipates they will become even more widespread in a purely electronic situation?

Jonathan Djanogly: My understanding is that the hijacking of companies, as I described it earlier, is becoming increasingly widespread. I do not have statistics. The Minister might have them, and if she does, I shall be grateful to hear them. It is increasingly common and very simple to do. All that one has to do is to go to Ryman’s get a couple of 288s—[Interruption.] I take the Whip’s point that I should not, perhaps, explain too clearly what to do. However, it is a simple procedure.

Jim Cousins: I am grateful to the hon. Gentleman for that clarification, and no doubt we can look into the matter. I was not seeking an instruction manual.

Jonathan Djanogly: I shall not continue in that vein. I have made the point that there will be an increased risk. When the Minister spoke about the ways of dealing with it, she mentioned a few things that happen now, such as identifiers. If she and her Department put their minds to the issue, they might prevent future problems. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 13 ordered to stand part of the Bill.

Clause 14 ordered to stand part of the Bill.

Clause 15

Issue of certificate of incorporation

Jonathan Djanogly: I beg to move amendment No. 6, in clause 15, page 6, line 37, leave out subsection (3).
I shall be brief. Why is it necessary for the certificate to be signed by the registrar? On the back of the previous debate, the Minister might say that it is for security purposes. However, proof is publication on the Companies House register. In practice, companies often lose their certificates, it is difficult to get replacements and there is a cost involved in doing so. What is the Minister’s view?
On a slightly wider issue, will the certificate be in the same paper format as now, or will there be a possibility of issuing it online?
It is a practical point, because at present a same-day incorporation requires a trip to Companies House, with all the hurdles that that entails, whereas it would be quicker to do it online. Harking back to the previous debate, I am aware that there are security implications, and I shall be grateful if the Minister will advise us on how they might be addressed.

Margaret Hodge: I shall deal with the security implications before the issue of signing of certificates by the registrar. There are increasing requirements,not least in European Union directives, that communication take place electronically, so we would probably have to adopt the practice anyway. Ensuring security therefore becomes a major issue, and that is at the top of the agenda of all the companies that are involved in such business. I see lots of documents on advances in the area—I do not know whether the hon. Gentleman does too. A week or two ago I attended a Council meeting at which, in light of our particular responsibility for information and communications technology, the Council of Ministers discussed it as the next major area of work. We shall see whether that leads to further measures or directives at the European level, which is probably the sensible level at which to take such action.
As to online issuing of certificates, in principle we do not have any objection, although we shall have to consider the practicalities. The certificate can be signed online, so I do not see why on earth it should not be issued online. If the hon. Gentleman will allow me to take that idea away, we shall reflect on it, as it is obviously sensible. As to the presence of the provision in the Bill, I am told that everybody wants conclusive evidence to the whole world that a company has been duly and properly formed and can be relied on by third parties who want to know that they are dealing with a properly established company—I think that the hon. Gentleman would accept that. It is now much simpler to get such authentications: I am told that it is now possible for the registrar to sign documents electronically and, indeed, her official seal can now be applied electronically.
On the Bill’s provisions concerning duties and functions of the registrar, clause 768(2) provides that her rules may make provision on how a signature or seal is to be authenticated in such circumstances. That requirement is not overtaken by other provisions of the Bill that enable the registrar to specify matters relating to the authentication of certain documents. The new provisions in part 29 deal primarily with the authentication of documents that are sent to the registrar, whereas the clause deals with a document that is sent by her. That is why the provision appears where it does.
The argument that is made is that the clause is useful and necessary. In that spirit, I hope that the hon. Member will withdraw his amendment.

Jonathan Djanogly: I thank the Minister for her helpful response, her agreement to look into the matter further, and her recognition of the important security implications of electronic communication. I am pleased that the Government will address the issue and, on that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 15 ordered to stand part of the Bill.

Clause 16

Effect of registration

Amendment made: No. 79, in clause 16, page 7, line 17, at end insert
‘, or
(c) as an authorised signatory,'.—[Margaret Hodge.]

Clause 16, as amended, ordered to stand part ofthe Bill.

Clauses 17 and 18 ordered to stand part of the Bill.

Clause 19

Power of Secretary of State to prescribe model articles

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: I understand that new table A model articles and other model articles are to be issued. Will the Minister provide a timetable for consultation on such matters and details of any problems with them that may have arisen to date? Such documents are vital to companies and the operation of their businesses. Is it the Government’s intention to adjust existing articles, table A and so forth, or to give them a thorough overhaul? I note, in that regard, that the language under table A is somewhat dated and it is probably about time that it was given a thorough going over.

Quentin Davies: I want to probe a little the idea of model articles. Presumably, it is the state not in legislative mode but in advisory or nanny mode. I want to make it clear that I had properly understood that that is the case because, under subsection (3),
“A company may adopt all or any of the provisions of model articles”,
which makes the idea look very voluntary.
The word “prescribe” is used under subsections (1) and (2), and I want to be clear whether it is intended that pressure is to be put on companies to adopt the model articles or whether the Government envisage sanctions for companies that do not adopt them. Above all, I protest slightly that we have reached the clause that provides for the model articles without having any notion of what the Government have in mind. That very bad habit is becoming more and more common and, as each year goes by, we come across Bills that provide for the Government subsequently to make regulations, produce guidance documents or, in this case, produce model articles without our having any idea what they have in mind.
After seven years of consultation on the subject, it is reasonable to expect that, by the time the Bill is brought before Parliament, the Government have shown us the colour of their money and explained what the model articles would be. That would enable us in the House of Commons to do our job and see whether there were any difficulties or perversities about the proposals. Even though they are voluntary, presumably they will have a quasi legal force so that, if a company were challenged about the adequacy of its articles and it can point to having adopted the model articles provided by the Secretary of State, that will be a full defence. We do not know whether the model articles will be adequate for the purpose.
Will the Minister explain the status of the model articles? Are they purely advisory? Is there any intention to put pressure on companies to adopt them? Will the Minister explain why we do not have the model articles in front of us? The position is highly unsatisfactory. Can we have an opportunity before we discuss the Bill on Third Reading—at least before it is debated on Report, so that we can consider the matter on the Floor of the House—to know what the Government have in mind for the model articles? After all, surely seven years is long enough for someone to draft them. If the Government had the concept that model articles are required, the onus is on them to show us what they have in mind.

Margaret Hodge: I hate to disappoint Opposition Members, but the articles are out for consultation. Clearly, they have not seen them. The articles are on the Department of Trade and Industry website, as well as in the Library. I suggest that Opposition Members look at them and, if anything worries them, they can ask me about it.

Quentin Davies: That is simply not good enough. The Government are not treating Parliament as Parliament ought to be treated. If there are model articles and other documents referred to in the text of the Bill that are germane to proceedings, they should be distributed to Members of Parliament. There are all kinds of information on all kinds of websites across the Government; Members of Parliament cannot be expected simply to trail through every Government website on the off-chance that they will discover something relevant to the Bill. It is up to the Government, who are submitting this draft legislation to us, to ensure that we see the relevant documents.
I have not seen a copy of the model articles; I do not know whether Committee colleagues have been luckier than me. If the Minister has a copy, I should be grateful if she passed it to me.

Margaret Hodge: The articles may have passed the hon. Gentleman by. I accept that we are all busy and that lots of documents pass over our desks, but presumably he knows that the articles for private companies were published in draft with the White Paper in March 2005. I presume that he had the chance to look at them then. Approximately a week ago, we placed the model articles for public companies in the Library of the House. They were certainly there for the Committee to consider, and the hon. Gentleman can no doubt access them now.
If the hon. Gentleman wishes, I shall be happy to ensure that all Committee members are sent copies. However, the articles have been published.

Quentin Davies: Once again, far from apologising, I want to emphasise my point. The Government are simply not treating Committee members as they should. The Government should take the initiative in ensuring that the Committee sees such documents. The Minister knows perfectly well that the amount of paper produced every day by the Government, including by her own Department, probably equals several editions of the “Encyclopaedia Britannica”.
All kinds of documents are placed in the House. A year ago, I was hardly likely to read a White Paper on the off-chance that a year later I might be selected to sit on a Committee that was considering a Bill relevant to it. If I did that, I would do nothing else for the whole of my life.
The Minister is being not reasonable but bureaucratic in dealing with my point. I hope that she will now become practical. I should be very grateful if she circulated the model articles to me and all other Committee members without further delay.

Margaret Hodge: We can certainly circulate them to Committee members, but the draft model articles were published 15 months ago. I get a lot of correspondence on issues relating to this Bill. Had he shown an interest in the articles, the hon. Gentleman might have written to me and asked what further steps had been taken. When we published them in draft, it was clear that they were for consultation. Obviously, we want Committee members to have access to the articles so that they can be properly considered as we come to the clauses that we are considering.

Quentin Davies: I am grateful to the Minister for giving way yet again. I have made my point. May I ask her to ask her officials today—without delay—to go through the remaining 90-odd per cent. of the Bill and see whether it refers explicitly to any documents that have not been distributed to the Committee? If there are such documents, will the Minister be kind enough to ask her officials to ensure directly that the Committee has sight of them, so that we know that they are relevant to our proceedings?

Margaret Hodge: I am happy to do that.

Shailesh Vara: For the sake of clarity, may I ask the Minister when precisely the consultation period for the articles started? For the record, 15 months ago, at least four Conservative Committee members were not even Members of Parliament. The hon. Member for Solihull takes that number to five. To expect people who are not even Members of Parliament to start a consultation process on a document is somewhat lame.
I wholeheartedly endorse the point made by my hon. Friend the Member for Grantham and Stamford(Mr. Davies), that the Committee should be informed about any other items intended to be introduced by stealth, to the extent that it is unaware of them.

Eric Illsley: For the sake of clarity, I should say that interventions have taken up too much time this morning. Members’ interventions should be brief, and Members should clarify whether they are intervening to make interventions or speeches.

Margaret Hodge: Thank you for that guidance,Mr. Illsley. I am slightly surprised by the interventions made, both last week and this, by the hon. Member for North-West Cambridgeshire. The idea that the model articles, which were published before he was a Member of Parliament and I was the Minister with the relevant responsibility, should suddenly have been republished when he became a Member of Parliament or when I became the Minister with responsibility for these issues, is patently absurd.
Mr. Vararose—

Margaret Hodge: If the hon. Gentleman will give me a chance, I am responding to his previous point. The idea that we are doing anything by stealth is ludicrous. All the parties with which we have engaged since 1998 in taking forward the review of that intricate area of company law have been clear that it was an inclusive and open process.
If the hon. Member for North-West Cambridgeshire failed to see that or to have it drawn to his attention as he prepared for the Committee, I am sorry. I shall ensure that the articles that have been placed in the Library are circulated. On any other matters, it would be sensible probably to draw the Committee’s attention to the location of the relevant papers, rather than to distribute them. That way people will know where on the website or in the Library they can get them. I hope that that will be sufficient for hon. Members—in order to save a few trees.

Crispin Blunt: The Minister and her Department have proceeded with good intentions over a long consultation process, but she needs to differentiate between Members. My hon. Friends behind me, like her hon. Friends behind her, will not have known that they were going to be selected for the Committee until the Selection Committee met. My hon. Friend the Member for Huntingdon will have had some idea that the Bill was coming down the tracks and an opportunity to follow it in detail. However, I ask her to give as much assistance as she can to Back Benchers by identifying and producing documents to make their job as easy as possible. They have not been involved in the process since 1998 like officials in her Department.

Margaret Hodge: This might help the Committee; I have just been informed that there is a list of the relevant websites at the back of the House of Commons Library note on the Bill. That might be of further assistance to the Committee.

Quentin Davies: Briefly, the Minister now seems to be going back on the promise that she gave me a moment ago, for which I was grateful. The Government should give us the documents, not say, “Go and look at websites”, so that we spend our time looking at websites. We need to have the documents. The Government have them, or claimed to have them, and she was gracious enough to say that she would make them available. I take it that that undertaking is still valid. I am still grateful for it and look forward to seeing the documents.

Margaret Hodge: I was simply reflecting the fact that I would like to save a little bit of paper. But if Members feel strongly about having all the bits of papers, rather than references to them, I am happy to help out. I know how much paper we get through, and how much we bin before even looking at it, so it seemed sensible just to provide the relevant references. However, if the Committee so wishes, I shall provide the documents. It is no great problem.

Shailesh Vara: The Minister should speak for herself on the amount of material that is binned. The Opposition take the Bill seriously and certainly will read through all the material that comes our way.
The Minister has repeatedly made the point that there has been a lengthy consultation process, that many organisations have been consulted and that the Bill has been debated in the House of Lords. I point out to her that many of those organisations have put forward conflicting views, and it would not be right for the Committee simply to accept all those views; it is not possible to do so because of the conflicts. It is the purpose of the Committee therefore to try and—

Eric Illsley: Briefly.

Shailesh Vara: Certainly, Sir. The Committee must ensure that we arrive at a proper decision, so constant reference to previous organisations is perhaps not appropriate.

Margaret Hodge: After that debate, I cannot remember all the points that have been raised. Opposition Members are not the only people in the Committee taking the Bill seriously. This Government instituted the review of company law; we did it thoroughly, and it is insulting, yet again, for him to suggest that he and his colleagues are the only ones who take the matter seriously.
Of course there are conflicts. We have just spent considerable time discussing one such conflict, to which we shall return—whether there should be regulation and we should insist that every company, be it public or private, have a company secretary. That is a contentious issue, on which the Government have taken a view. No doubt the hon. Gentleman will also reflect on what is right, rather than what has been requested by a certain group of people lobbying him at a certain time.
I wrote, I hope, to all members of the Committee when welcoming them to the Committee and in that letter I highlighted other information available on the various DTI websites. It might help hon. Members if they return to that information. I asked them to contact me for further information if they so wished and it would be helpful if they did that.
I was asked about the status of the model articles, as I recall. I hope that hon. Members will come back to me if I forget something. I was asked whether the model articles were advisory, I think by the hon. Member for Huntingdon—[Hon. Members: “No.”] Sorry, I should have said the hon. Member for Grantham and Stamford. The model articles are advisory. They are not in any way required; no company is required to adopt them. However, they operate in default, so if a company has not adopted articles, these can be used if the need so arises. It is because of the default provision that they are prescribed; that is why the term “prescribed” is used in the clause.
In discussions that I have had with companies recently, there has been quite a lot of support for the development of the advisory articles. That means that people do not have to reinvent wheels and think through themselves what they have to put into articles. They can look at these articles and see whether they need to adopt them.
I was also asked—I think it was indeed by the hon. Member for Huntingdon this time—whether there was an intention to adjust existing articles. No, it has never been the case that successive Governments have replaced the articles of existing companies. I hope that what I have said deals with the issues that Opposition Members have raised about the clause, that I have convinced them that the Bill makes sense and that we can approve the clause.

Jonathan Djanogly: I am grateful to my hon. Friend the Member for Grantham and Stamford for initiating the debate, to which several of my hon. Friends have contributed. It has highlighted the importance of the model articles for companies—that is an essential part of what we are doing with the Bill—and the need to consult fully on the matter.
There has been some confusion about when the model articles were put forward in the White Paper and when they were consulted on. I have just seen in a pile of paper that the consultation started on 8 June, so it has not being going on for long. My first point is that the consultation is ongoing. The fact that a White Paper was published, however long ago that was, is unrelated to the fact that the consultation has been going on for only a couple of weeks. On that basis, my hon. Friend the Member for Grantham and Stamford made an important point.

Margaret Hodge: There is a misunderstanding. There was a consultation on draft articles, which was initiated when we published the White Paper in 2005. We then commenced a further consultation on articles for public companies; the one in 2005 related to private companies. We commenced a consultation relating to public companies on the articles that we published before the Committee sat. It is those that I have agreed to distribute around the Committee.

Jonathan Djanogly: That clarification is helpful.
The second point that I wanted to make is that what was in a White Paper is not necessarily what was consulted on. There may have been changes between the two dates. For that reason as well, it is fair to make the point that we need to have a fresh look at this matter. However, I thank the Minister for her offer to send out the documents and related documents—I think that is what she said—so that what has happened will not happen again and the Committee will be advised in advance. Finally, I would be grateful if she could say when the consultation is likely to end and when the results are likely to be published. I hope that these important model articles will come into play at the same time as the overall provisions of the Bill.

Margaret Hodge: I am informed that the consultation will continue until the end of August.

Question put and agreed to.

Clause 19 ordered to stand part of the Bill.

Clause 20 ordered to stand part of the Bill.

Clause 21

Alteration of articles

Margaret Hodge: I beg to move amendment No. 80, in clause 21, page 8, line 28, leave out ‘alter' and insert ‘amend'.

Eric Illsley: With this it will be convenient to discuss Govt amendments Nos. 82, 84 to 89, 101, 102, 105 to 107, 104, 108 to 111.

Margaret Hodge: The amendments look extremely complicated. In fact, they are tidying-up amendments arising out of debates in another place. The Bill makes provision in clause 21 for changes to company articles that may be made by a company’s members, and for changes that may be made by other means such as legislation, which is dealt with in clause 35, or by the courts or other authorities such as the Charities Commission, which is dealt with in clause 36. The amendments are intended simply to introduce a greater consistency in the way that the Bill talks about different kinds of changes.
The amendments ensure that when the Bill refers to changes made to a company’s articles by its members, the company’s articles are generally referred to as being amended, and the changes are referred to as amendments. When the Bill refers to changes made by legislative, judicial or other external intervention, the company’s articles are generally referred to as being altered, and the changes are referred to as alterations.
The thinking behind this approach is that a company’s articles can be changed either by changing the text or by means of some free-standing overriding provision. We think that “amendment” is the normal way of describing textual changes, and that it is by textual changes that companies normally change their articles, whereas legislation and courts are more likely to adopt free-standing overriding provisions. Since “alteration” naturally has a broader range of meaning, encompassing both textual changes and overriding provisions, the Bill should generally refer to amendments when it is dealing with changes made by the company’s members and to alterations when it is dealing with changes made by legislation or external agencies. I should make it clear, however, that we do not intend in this way to limit the ability of companies to change their articles by the adoption of free-standing overriding provisions, or the ability of courts, for example, to change a company’s articles by textual amendment.

Jonathan Djanogly: I do not intend to take too much of the Committee’s time debating the merits of the words “alteration” and “amendment”. I agree with what the Minister said.

David Howarth: And so do I.

Amendment agreed to.

Clause 21, as amended, ordered to stand part ofthe Bill.

Eric Illsley: We now come to clause 22. Members will note that clauses 22, 23 and 24 are grouped for debate with the amendments under clause 22 on the selection list. That means that the questions on those clauses—that is, the stand part questions—will be put to the Committee for decision without further debate when we reach them. The point is, obviously, that as we debate clause 22 and the amendments that go with it, we will debate clauses 22, 23 and 24 stand part as well, because the amendments to the group of clauses are so substantial to them that it would be easier to debate them in that way. So, if any Member wishes to raise a point on any of clauses 22, 23 and 24 that would have come under the debate on clause stand part, they should raise it in the next debate.

Clause 22

Entrenched provision of the articles

Margaret Hodge: I beg to move amendment No. 81, in clause 22, page 9, line 3, leave out paragraph (a).

Eric Illsley: With this it will be convenient to discuss the following: Amendment No. 8, in clause 22, page 9, line 3, leave out from ‘repealed' to end of line 6.
Government amendment No. 83.
Clause stand part.
Amendment No. 9, in clause 23, page 9, line 18, leave out subsection (2).
Amendment No. 48, in clause 23, page 9, line 22, leave out subsections (3) and (4).
Clause 23 stand part.
Amendment No. 10, in clause 24, page 9, line 28, after ‘articles', insert ‘by unanimous resolution'.
Amendment No. 11, in clause 24, page 9, line 28, after ‘articles', insert
‘by unanimous resolution less one vote'.
Amendment No. 12, in clause 24, page 9, line 28, after ‘articles', insert
‘by a resolution of at least 90% of its members'.
Clause 24 stand part.

Margaret Hodge: At present, under section 17(2)(b) of the 1985 Act, companies are able to provide that certain provisions of their memorandum can never be changed. As we discussed, under the Bill, the memorandum will contain the bare information that is required to evidence the intention of the founder members to form a company and companies will not need, or be able, to alter their memorandum.

Jonathan Djanogly: Will the Minister explain what part of the memorandum a company cannot change at present? I thought that changes were limited to company incorporation or something similarly limited?

Margaret Hodge: It is limited. Would it be helpful if I wrote to the hon. Gentleman with the specifics?

Jonathan Djanogly: That is fine.

Margaret Hodge: Clause 22(1)(a) is an attempt to replicate section 17(2)(b) in the context of new Bill provisions, where all information of constitutional significance will be contained in articles. More generally, clause 22 implements the recommendation of the company law review that companies should be permitted to entrench their provisions and their articles by making the amendment of those provisions subject to the fulfilment of conditions more onerous than the passing of a special resolution. That is what is normally needed to amend articles. If a company wished to do so, it could state that a particular provision could be changed only with the consent of all members.
We were prompted to table amendment Nos. 81 and 83 by similar amendments that were laid in another place by Lord Hodgson, to whom we are grateful for having directed our attention to reconsideration of the provision. I think that the hon. Member for Huntingdon raised these issues on Second Reading too. It seems to us that the absolute entrenchment provided for by section 17(2)(b) and clause 22(1)(a) is not a good idea except in the case of special types of companies, such as charities, for which, in any case, we have separate rules. We cannot see any general benefit in allowing companies to set bits of their constitution in stone and put them beyond the reach of amendment even if they get unanimous agreement of all their members. Inflexibility can, as we all know, be a weakness. More often than not, things that seemed a good idea may turn out to be more trouble than they are worth.
For that reason, I do not wish to accept amendment No. 8, which seems to offer a world in which provisions can only be entrenched absolutely. I am not sure whether that is the purpose of the amendment, but that is how I read it. Instead, Government amendmentNo. 83 allows for the possibility of change where it is clearly sensible, by saying that any provision for entrenchment can be bypassed if all the members agree.
I turn now to amendments Nos. 9 and 48. If entrenched provisions are to be capable of amendment, it is none the less important that they are amended only in accordance with the provisions for entrenchment that are set out in a company’s articles. Clause 23 aims to create a straightforward mechanism for checking that that has happened. First, we would require the company to notify the registrar when it has included provision for entrenchment in its articles. Secondly, when such a company delivers a document that makes or evidences an amendment to its articles, it is required to deliver, with that document, a statement of compliance. That should state that the amendment has been made in accordance with the company’s articles—in other words, in accordance with any relevant provision for entrenchment. The requirement to file a statement of compliance provides the registrar, and anyone who consults the public register, with an assurance that the company was at least aware that special rules were in force in relation to changes to its articles.
In addition, if the provision for entrenchment has been inadvertently overlooked by the company and the change to the articles is simply filed as a special resolution, without a statement of compliance, the registrar will be able to ask the company to certify whether it has observed all the relevant formalities before registering, what might otherwise be, an unauthorised change to the company’s constitution.
Few companies will take advantage of the entrenchment process. For those that do, it is not a major additional bureaucratic burden. It may help some of them make sure that they have got things right.
Finally, I turn to amendments Nos. 10, 11 and 12. In clause 24, the thrust of the amendments specifies a default threshold for removing a provision for entrenchment. I applaud the creativity of the hon. Member for Huntingdon in providing three thresholds to choose from. However, I fear that I will reject all of them because, in our view, that provision is not necessary.
Provision for entrenchment may itself set out the conditions in which that entrenchment can be removed. That is the prudent course. As with any of the other articles, if it does not, it can be removed by a special resolution, which may not be what was intended.
It is not appropriate or desirable for the statute either to prevent companies from setting their own laws about conditions in which a provision for entrenchment can be removed or by imposing a condition, other than the passing of an existing special resolution when companies have not made their own rules on that point.
It could be argued that the default position should be unanimity, rather than allowing for removal by special resolution where the provision for entrenchment is not itself entrenched. That is more likely than not to cause inconvenience in some cases, particularly in companies with many members.

Jonathan Djanogly: What the Minister called inconvenience, I would call shareholder democracy.

Margaret Hodge: Shareholder democracy can be entrenched in other ways—through other existing provisions—to enable shareholders to raise issues through resolutions in meetings of shareholders, but is it appropriate to involve 100 per cent. of them? Is the hon. Gentleman suggesting that 100 per cent. of shareholders should be involved if a rule is changed?

Jonathan Djanogly: No, I am saying that we should keep things as they are, which is that 75 per cent. are needed to change the articles of a company.

Margaret Hodge: Yes, indeed. Under a special resolution, if there are no provisions around entrenchment, a special resolution would be the way in which articles are changed. I am not sure how that75 per cent. fits with the point about 100 per cent., which is what I was addressing when he suggested that we would only have true shareholder democracy through 100 per cent. participation.

Jonathan Djanogly: I am not sure about participation, because that would involve encouraging people to vote rather than percentages required to pass resolutions. However, in terms of passing resolutions, we will be maintaining that the status quo is appropriate. Notwithstanding that, we have provided the Minister with some fallback positions to take away the pain that she is going to be leading companies into through her proposed clause.

Margaret Hodge: No doubt the hon. Gentleman will make it clear when responding to my contribution where he thinks the pain is. In our view, we are protecting shareholders appropriately by leaving it to them to decide what threshold to set rather than setting it in statute.
The other point that I ought to make is that the special resolution provision allows a resolution to be passed with a 75 per cent. shareholder vote. In a proper shareholder democracy or, indeed any democracy, minorities must be looked after as well. I hope that the hon. Gentleman will accept that.
I was arguing that unanimity less one vote and 90 per cent. of members seem rather arbitrary options. What if a company has thousands of members, or one member who holds 90 per cent. of the voting rights? Anomalies could arise because of the way that the hon. Gentleman has framed his amendments. Well advised companies will provide a threshold for removing provisions for entrenchment to suit their own circumstances with regard to the shareholding composition of each particular company. We cannot see that a default threshold other than the passing of a special resolution makes sense.

Jonathan Djanogly: Companies can, indeed, set thresholds, either in their articles or through contract, but the ability to prevent the articles from being changed by requiring more than a 75 per cent. majority is not permitted. At 75 per cent., the articles can be changed. Therefore, when people talk about entrenchment, it is within that remit.

Margaret Hodge: I understand that, but I hope that the hon. Gentleman will also accept that we should enable companies to set their own walls around how they want to deal with entrenchment. That is all that the clauses try to do.
I have given a lengthy explanation. The hon. Gentleman is shaking his head from a sedentary position. I shall listen to what he says and then respond. I hope that he will agree to withdraw his amendments, which we believe to be undesirable.

Jonathan Djanogly: Given the way that the clause and amendments are structured, the Chairman’s decision to merge them was a wise one. I shall start with clause 23, move to clause 24 and then discuss clause 22, which I hope will provide clarity and structure in what I say.
I begin with amendment No. 9. Clause 23 provides for a notice of entrenchment to be filed, but if an entrenchment resolution is passed, surely the resolution file at Companies House plus the revised version of the articles filed should be adequate. I cannot think of other such compliance provisions—perhaps the Minister could name some—so I ask the purpose of the extra piece of paper. Furthermore, the measures will increase regulation. The director will need to ask a lawyer to confirm whether the new notice is compliant. Even if it is blatant, he might want to do so as a belt-and-braces safeguard.
I turn to amendments Nos. 10 to 12. If the entrenchment clauses remain in the Bill—I shall argue in the stand part debate that they should not—better provision should be made for removing them. As the Minister pointed out, I have provided three possibilities for probing purposes. The first, in amendment No. 10, is a unanimous resolution. I note that, at last, the Government have accepted that concept and introduced their own amendment to that effect, so that is at least a move in the right direction, and we are pleased.
Secondly, amendment No. 11 allows for the fact that public companies always have more than one shareholder and private companies pre-1989 had to have at least two. Many still do because they never got rid of the spare shareholder post-1989. The way in which public holding companies got round that was to find an individual, normally one of the company’s directors, who would hold the second share subject to a declaration of trust, whereby that director promised to act in accordance with the holding company’s wishes. Such declarations of trust were in practice sometimes not made, depending on how efficient the company secretary was; sometimes they have been lost in the mists of time; or sometimes directors leave a company and old forms get thrown away. That means that getting unanimity can often be tough, which is why I suggest that articles should be removed by unanimous resolution less one vote. There may be other ways to get round the problem, and I would be grateful to hear them from the Minister.
Thirdly, amendment No. 12 puts back into play an amendment tabled by Lord Hodgson to reduce to90 per cent. the level of agreement required for the removal of articles. Lord Hodgson said that a figure of 90 per cent. would tie in with the amount required to buy out a minority in a takeover situation. I add that10 per cent. is the level needed to call a general meeting. Those amendments represent our three fall-back positions.
I now come on to amendment No. 8, amendment No. 7, which has not been selected, and clause stand part. As I have said, their provisions were discussed in Grand Committee and on Report in the Lords. The more I look at it, the more concerns I have about the company law review proposal both in mechanical and, increasingly, conceptual terms. Will the Minister explain clause 22(1)(b), which as often as I have read it, I simply do not understand? I note that she has tabled an amendment to delete paragraph (a), and I was not sure what that meant either. Perhaps it does not have to be explained now that it has been deleted. Why is there a reference to procedures “more restrictive” than those applicable to a special resolution, particularly as such resolutions can themselves be passed conditionally?
The Minister said that one reason for including these clauses is that some items in a memorandum of association cannot currently be changed. I intervened to ask about that, and she confirmed that the only current absolute entrenchment provision relates to the country of incorporation. With respect, that is not a strong point. I note that in the Lords Ministers explained that the mechanism in question will be useful now that there is to be no memorandum of association, and I appreciate that while a company can currently change its articles, it can only amend its memorandum. Other than that one provision, however, it can be amended with 75 per cent. agreement. I am not sure what the Government’s point was. Will the Minister elaborate on it?
One hears talk of investors, particularly venture capitalists, wanting to entrench rights. That is normally done by inserting veto provisions into the articles of association, usually relating to the management of the company. The same items are also typically agreed through consent clauses in contracts, with a shareholders’ agreement. However, because changing articles requires a 75 per cent. vote, the entrenchment aspect is liked by venture capitalists. As the articles are publicly filed, the entrenchment also acts as notification of the special arrangements to third parties. To what extent is the situation improved by extending those entrenchment provisions to 100 per cent. of a vote, rather than 75 per cent., which currently exists and will still exist, as the Minister rightly said, after we agree the Bill?
I am not entirely in the know about why we need this provision. What is worse is that a single shareholder—a holding company, say, or a group of manager-owners—could use this entrenchment procedure as an effective poison pill, for instance, to entrench their rights to named individuals being paid huge or index-linked salaries. If the company were taken over or purchased, it would presumably need to be wound up to get round the entrenching procedures in the Bill. What if that company held other assets? The situation could become messy.

David Howarth: The hon. Gentleman is making an interesting point, but surely the answer to it is that under clause 23 the entrenchments can only be made at the start when the company is formed or by unanimous consent. I do not see how the poison pill can be created later.

Jonathan Djanogly: If two owners were to set up a company and they owned 100 per cent. of it, they could put in place whatever provisions that they wanted at the outset. That is my point and my concern.
The Government said that they would review this matter on Report, but we heard nothing on Third Reading in the Lords. Now the Minister comes up with a compromise, saying that 100 per cent. of shareholders can end the entrenchment. That is an improvement but hardly, we would maintain, most people’s idea of democracy. It is interesting that, in opposition, Labour was happy to attack company director fat cats at every opportunity, but now it is proposing a method of entrenching fat cats’ rights and attacking shareholder democracy. The Government need to answer conceptually how they got to this position.
The Institute of Directors said in its June 2005 brief:
“In response to ‘Modernising Company Law’ we stated: ‘Entrenching provisions need to be approached with care. In commercial companies they could be dangerous as a company could be held to ransom by a single shareholder holding one share (if he has a genuine grievance, his remedy will normally be to apply to the courts). We think it is essential to make it explicit in the legislation that any entrenching provision (and any entrenched provision) may be changed by a scheme of arrangement approved by the court regardless of absence of unanimity (or other level of approval stipulated in the constitution). We consider that this will reduce the impact of companies happily introducing a requirement for unanimity then living to regret it when the business cannot move on. We also think that there should be no encouragement for commercial companies to adopt entrenching provisions—for instance, any model form of constitution for such a company should not include wording for entrenching provisions (even as an optional extra).’”
In relation to the latter point, I should be grateful if the Minister confirmed that the model articles that we have previously debated will not hold an automatic entrenching provision.
The clause is unnecessary, will lead to trouble and I suggest that the Minister considers dropping it. We should be considering ways to improve shareholder democracy, not restricting it with entrenchment provisions. I do not know what Cedric the Pig is up to these days, but the Government are looking more like “Animal Farm” every day. I shall recommend that my colleagues vote against the clause.

David Howarth: I find myself in the odd position of opposing both the Government’s amendments and those tabled by the hon. Member for Huntingdon and supporting the original draft of Bill. Perhaps I should be sitting elsewhere.
The argument against entrenchment seems to go against one of the fundamental ideas of company law, which is that members of the company should be able to set up their business as they wish. If they want to set it up with entrenched clauses and rights, that is up to them. If they want to set it up with entrenched clauses and rights, that is up to them. If that puts off other investors, which it might, that is their problem, because they could set it up in a different way. The basic problem that the hon. Gentleman put forward seems not to exist.

Jonathan Djanogly: Using the hon. Gentleman’s rationale, presumably companies can ignore not only future shareholders, but creditors, stakeholders and anyone else they like so long a couple of directors get together at the start to say, “This is what we will do; we will entrench it forever and a day. That is fine.” I do not buy that.

David Howarth: When we get on to clause 105 we will have a debate about the balance between creditors and shareholders. If a company is set up in a way that puts off people from dealing with it, that is the problem of the people who set it up, not the problem of the law. This is an unnecessary restriction on what people can do with their own companies.
Getting rid of the possibility of entrenchment undermines a particular use of entrenchment that has not been properly considered yet. I am thinking of joint venture situations, where two companies or organisations come together to set up a company to undertake a joint venture for a limited purpose. It is important for such deals that they cannot be changed or undermined for the period of the deal. Entrenchment is an important aspect of that.

Jonathan Djanogly: Again, I am afraid that I must disagree. A venture capitalist may want to entrench through a 75 per cent. proceeding but they will always be keeping in mind the next round of investment and the appreciation that additional investors will come into the company and therefore there must be an element of fluidity.

David Howarth: The hon. Gentleman is discussing a different point about venture capital. I was going to move on to that, so we might as well talk about it now. Again, it seems to me that if venture capitalists are prepared to put with various risks, that is up to them. An entrenched section of a company’s constitution obviously affects the business risk faced by investors in that company in particular ways. As long as everything is open and up front, people will be able to make their own judgments about whether investments are worth making.
My point was not about venture capitalists; it was about joint ventures and organisations coming together to create a special-purpose company to carry out a particular joint project between two organisations. In those sorts of situations, entrenchment becomes commercially important. Someone might ask why one would want an entrenchment under which people cannot agree to get out of it—

James Brokenshire: I am listening carefully to the point the hon. Gentleman is making about joint ventures. Does he accept that in practice it is possible, by way of contract, to have a class A share and a class B share and therefore for decisions to be made for the class A share for one joint-venture party and the class B share for the second joint-venture party to have to vote together. They are able to create such an arrangement by way of contract, rather than having to rely on a statutory provision that may not be able to be undone.

David Howarth: Yes, indeed. As the hon. Gentleman undoubtedly knows, there are other ways of doing things, connected with deadlocking companies in various ways. Those ways of undertaking joint ventures have grown up as a way of getting round the problem of not being able to entrench. It would be far simpler to be able to entrench provisions in the first place as part of a company’s constitution.
There is a point against absolute entrenchment: why should there be a situation in which the two parties come together and agree a situation where there is entrenchment even against their own agreement to give up the deal? That is because there is a commercial possibility that the two partners might wish to put themselves in a position where they cannot agree to call off the deal. They might wish to do that because they fear that they might give in to the blandishments of the other party at some later stage, so they set up a deal that cannot be called off. If we do not allow absolute entrenchment, we make such a deal impossible.
That arrangement contrasts with the deal that we were discussing a few moments ago, which can be called off by the parties by agreement. The two deals are quite different. Someone cannot set up a contract that cannot be called off by the parties, whereas entrenchment can go one step further.
The company law review team thought about a much wider set of commercial possibilities than the Government and the Opposition did. By removing the possibilities for entrenchment, we are removing commercial possibilities that might be valuable in future.

James Brokenshire: The hon. Gentleman says that it is impossible to entrench through contract, but surely it would be possible to entrench an understanding or agreement through contract using the sort of mechanisms to which we have alluded.

David Howarth: Not in the absolute way that the clause allows. Under a contractual arrangement, the two parties can get together to agree to end the contract. The entrenchment provision in the Bill goes one stage further and allows an entrenchment that can apply even if the parties agree to remove the entrenchment. There is a commercial reason why that might be desired: parties might not want to be put in a position in which the other side tries to persuade them to change their minds.
I suppose that the illustration to give is the story of Ulysses and the Siren. Members will remember that Ulysses—Odysseus—was travelling on his ship and heard about the beautiful song of the Sirens, but he knew that the song would attract his sailors and make them leave their ships, and they would be killed on the rocks. He got his sailors to bind him to the mast, so that he could listen to the song of the Sirens and not be destroyed. The entrenchment provisions are an attempt to allow that possibility in commercial circumstances. They mean that the only way out of the problem of disagreement or people changing their minds is not agreement by the parties, but by action by the court under section 459 of the 1985 Act or by winding up on just and equitable grounds. That is what the parties in this kind of deal want; they want the deal to be so heavily entrenched that the only way out of it includes the supervision of the court. I ask the Minister to reconsider her amendment, and I hope that the hon. Member for Huntingdon will not press his amendment to a vote.

Margaret Hodge: We sit in the middle of the two arguments, and that is probably the right place to be. I shall deal with some of the detailed issues before discussing the point of principle.
I was asked why notice needs to be given to the registrar. I have already given the answer, but I shall repeat it, if that helps the hon. Member for Huntingdon. In clause 23, we are trying to create a straightforward mechanism for checking that that has happened. First, we require the company to notify the registrar when it concludes provision for entrenchment in its articles. Secondly, when such a company delivers a document making or evidencing an amendment in its articles, we require it to deliver with that document a statement of compliance, stating that the amendment has been made in accordance with the company’s articles—that is, in accordance with any relevant provision for entrenchment.
I was asked what clause 22(1)(b) is about. It enables companies to set a higher threshold than that required to pass a special resolution. That is, in fact, the essence of entrenchment. Companies are also currently permitted to entrench provision in their memorandums.

Jonathan Djanogly: Will the Minister explain the purpose of deleting paragraph (a)?

Margaret Hodge: We are deleting that paragraph because we accept—this is why I said that we sit in the middle of the two arguments—that there may be circumstances in which it is right to give a provision that enables people to review whether the entrenchment should hold. Clearly, leaving in clause 22(1)(a) would not enable that to happen.
It was alleged that directors could use the entrenchment mechanisms to give themselves permanent rights to, say, excessive salaries; that was one of the things that the hon. Gentleman alleged that we were doing. Directors are not able to enforce rights that are given to them as directors under a company’s articles, so that would not be an effective way for directors to guarantee their level of remuneration. The articles are a contract between a company and its members as members.
In the short time that I have had to get to grips with the Bill, I have, as a non-lawyer, learned a lot—Imight even get a degree out of it—about the case of Hickman v. Kent or Romney Marshes Sheep Breeders Association, and the provisions reflect that. If companies want to entrench provisions about directors’ remuneration, or anything else in the articles, they may do so; we are not preventing that from happening. However, the amendments seek to ensure that any entrenchment should be capable of being removed if a company’s members change their minds.
Why have a concept of entrenchment? Why go beyond the special resolution? That is the nub of the argument. We have to look back at the Companies (Audit, Investigations and Community Enterprise)Act 2004, which introduced new provisions that make it difficult to entrench provisions in articles. There was a demand for us to do so, particularly from social enterprise and community interest companies. Not every company will want to be eligible, or to be a community interest company. We agree with the CLR that the facility should be available generally, so that people can avail themselves of it if they wish to do so.

Jonathan Djanogly: What sort of things might community interest companies want to see entrenched?

Margaret Hodge: I suppose that they might want to entrench in their articles things such as the activities that they undertake and the purposes to which their profits might be put.

Jonathan Djanogly: I am pleased to hear that. However, if the driver of the provision is community interest companies, why can provisions not be put in place for community interest companies only? Why should they affect all other companies as well?

Margaret Hodge: If these are just provisions of which companies can avail themselves, why limit it? I cannot, off the top of my head, think of other circumstances in which a company might wish to entrench its provisions. We might go back to what we were saying earlier about a specialist company wanting to limit itself to its specialist activity. There is a range of things—[Interruption.] I am being assisted with ideas. It might be, as the hon. Member for Cambridge said, a joint venture. There are all sorts of situations in which companies might seek to entrench, and we should not try, in this Bill, to limit their ability to do so.

Shailesh Vara: By way of clarification, can the Minister give any indication as to roughly how many community interest companies there are?

Margaret Hodge: About 300—[Interruption.]

Jonathan Djanogly: The Minister looks at me in astonishment. The reason for my astonishment is the news that the driver for destroying company shareholder democracy is 300 community interest companies.

Margaret Hodge: I have two things to say to the hon. Gentleman. I did not say that that was the driver for destroying company shareholder democracy—I do not think that it is—and community interest companies are pretty new. We passed the legislation to facilitate their development only a year ago. They might well grow over time. However, other bodies—joint venture companies could be one, and those who are better versed in these matters might be able to think of further examples—might want entrenchment provisions.

Jim Cousins: Under the Government’s building schools for the future programme, there is provision for local education partnerships to operate the programme in company format. My local authority is doing that, and it will have a 10 per cent. shareholding. It might well—indeed, it might be well advised to—entrench a limitation on how the company might operate to protect its interests in future.

Margaret Hodge: That is an excellent example, and I thank my hon. Friend for it. I am somewhat puzzled as to why there is an objection to such a facility, because without it we would limit the ability of companies to pursue their objectives in the way that they would wish.

Jonathan Djanogly: Is it not the case that the proposal is to remove CICs from the consolidated Bill into a stand-alone Bill? If that is the case—the Minister may wish to elaborate on that—would it not be wise to put the provisions into that separate piece of legislation?

Margaret Hodge: It would be if we wanted to limit the provisions to CICs, which we do not necessarily need to do. The hon. Gentleman keeps saying that he believes the provisions to be an attack on shareholder democracy. All I can say is that it is up to members of a company to decide for themselves how they wish to deal with such issues in the articles that they themselves agree. We are not compelling them to go down a particular route.

Jonathan Djanogly: I do not think that to be the case in practice. What if, as the Minister said, that decision was taken at the outset by, say, the original two members. By the time lots more members come along, under the Government’s proposal—at least we have that—they cannot change anything unless 100 per cent. of them agree. It is entrenched.

Margaret Hodge: There will be facilities. That is why we have a middle route. We are not saying what the hon. Gentleman sets out, although it is what the hon. Member for Cambridge would like us to say. He would like the entrenchment to be permanent.
On reflecting on the debate in the House of Lords, we understood the argument that there may well be situations in which people want to challenge the entrenchment and override it. Therefore, we have provided that companies can set the rules under which they will decide whether to lift the entrenchment.
In the course of the debate, I have agreed rather more with the hon. Member for Cambridge than with the hon. Member for Huntingdon. We have had a pretty considered view on how to deal with entrenchment. I hope that I can convince the Committee that we have listened to the debate, which has taken place both in the House of Lords and outside with various stakeholder interests. We have produced a sensible compromise. It is a way forward that provides for entrenchment but ensures that it is not for ever.

Quentin Davies: I am a little concerned. I strongly believe that legislation in general, particularly company law, should be permissive. We should try to ensure that we provide the greatest degree of flexibility for the future, and that we allow people to run their businesses and order their lives in whatever way they want, subject only to ensuring that the rights of other people are defended.
It may well be that there are a limited number of cases when somebody wishes to entrench the articles of association of a company. What is clear is that one cannot entrench by contract for the simple reason that a contract under common law can always be varied by agreement of the two parties. If one wants to have a genuine sense of entrenchment—of something being absolutely permanent and irrevocable except only when it is overridden by a court decision—then one has to have the entrenchment provisions in company law, which we already have. Before we remove them, we ought to be careful, because we will be taking away one specific option that currently exists. I do not always have a lot of sympathy with the Liberal Democrats, but I do in this case.
The right hon. Lady is possibly on the wrong lines, because amendment No. 83 will provide for something less than entrenchment in our company legal system. It will mean that something is only entrenched to the extent that all the shareholders involved did not agree to change it. That is not strictly speaking entrenchment.
I am not familiar with the Bill’s form before it arrived in this House, but in the form in which it appears before us now it genuinely provides for entrenchment. It is clear from clause 22 that entrenchment can only take place either at the outset, when a company is formed, when, by definition, all members agree to it because otherwise they would not be joining the company, or subsequently by unanimous agreement. So the concern of my hon. Friend the Member for Huntingdon on shareholder democracy is fairly met in that provision, because the people forming the company are voluntarily binding themselves to an irrevocable arrangement.
If we go down the Government’s road and provide for such entrenchment subsequently to be capable of relaxation by agreement, there will not be an irrevocable arrangement and we shall deprive people of being able to reach such irrevocable agreements in future. It is not clear to me that the interests of third parties might be unreasonably damaged by entrenchment—I do not follow the argument that there will be damage to the company’s creditors or to other stakeholder interests.
Those people will know when they start to deal with the company concerned that they are dealing with a company that was formed in such a fashion. So, unless I am persuaded that there is some third party whose interests the House of Commons ought to have at heart and who will not be properly protected, I shall be very reluctant indeed to vote to destroy the possibility of forming a particular type of company and a particular type of arrangement between people who want to form a company.
The arrangement is provided for in the law and has not, so as far I know, produced any great scandals or difficulties. If we abolish it, we will restrict the scope of company law in this country.

Margaret Hodge: I thank the hon. Gentleman for that contribution—I have a lot of sympathy with it. I am not sure how people will vote if we divide, but he might vote with the hon. Member for Cambridge, and perhaps with us. The provisions that will be made in company articles on entrenchment will be freely entered into, so if on establishing its articles the company wishes to make entrenchment irrevocable, it can do so freely. Our amendments simply provide, in response to the debate in another place, the facility for companies to choose how to tackle the issue of entrenchment. We want to provide that choice for them.

Jonathan Djanogly: The Minister says that people can freely decide to enter entrenchment and that therefore it is justified. Hon. Members can agree freely to vote and pass whatever law they want, but they cannot bind future Parliaments; they cannot entrench legislation such that future Parliaments never have the right to change laws again. That is what we are talking about here.

Margaret Hodge: That is nonsense, if I may say so. It is always open to any party to change company law. Through the facilities that we propose, we are trying to provide some certainty for the operation of companies.
The hon. Gentleman has banged on and on and on about shareholder democracy. If we do nothing, however, the special resolution provisions will be the only ones that determine how changes can take place and they will be a challenge for minority shareholders—the 25 per cent. who will not be needed.

Shailesh Vara: If the Minister will not accept the shareholder democracy argument, will she accept the argument that other legislation will impact on companies? For example, there are numerous blocks of flats around this Palace, and the owner of each flat is a shareholder in a company for that block—the management company. The Commonhold and Leasehold Reform Act 2002 provided for leasehold enfranchisement by allowing leaseholders to purchase the freehold, and clearly the mentality and thought process of each shareholder were completely changed in light of the legislation. If that company was entrenched and, as is the case for many of the flats around here, people were overseas, it would be impossible to wind it up and to adapt to new legislation. Flexibility is needed. We cannot account for other legislation that will have an impact on companies.

Margaret Hodge: I understand that, and it is precisely the purpose of the amendments we have tabled today. They will ensure that when the company forms itself in the first instance, the people who freely come together and decide to form a company can decide whether they wish to entrench themselves. Members of a company in the situation described by the hon. Gentleman could take the option of winding up the company if they so wished, if it became irrelevant to them.

Shailesh Vara: If those companies cannot get each of the shareholders, they cannot wind themselves up. What might be freely entered into today does not take into account the circumstances that might exist in five or10 years in a fast-moving commercial world.
The whole company law structure has had to be consolidated and reconsidered in the 20 years following the passing of the 1985 Act. We are in an international world, technology is fast-moving, there are booms and the economy is fluctuating. The life of companies will alter with the economic cycles. To entrench companies in such a fast-moving economic reality does not help the business world.

Margaret Hodge: To be honest, we have been going round the houses on this argument long enough.

David Howarth: There are two problems. The first is a false analogy between politics and business. An unamendable constitution in politics might lead to terrible problems; revolution might end up as the only way to change the constitution. In business, the company merely gets wound up.
The second problem is that those who have spoken do not appear to have remembered that the court can wind up a company on the just and equitable ground, or minority shareholders can effectively be bought out on fair grounds under section 459 of the 1985 Act. It is not the same in principle or in practice.

Margaret Hodge: That is a helpful intervention. We shall support the amendments that stand in our name and resist those tabled by the Opposition.

Jonathan Djanogly: We have had an interesting debate, although I cannot say that I am happy with how it has gone, and the hon. Member for Cambridge has been logical in some of his thought processes, but not in his conclusions. Are we really saying that if shareholders cannot get on and have entrenchments, the way to bring it all to an end is to wind the company up?

David Howarth: That is not what anyone is saying. A company that is set up with an entrenchment takes that risk, but it is a risk taken by the people who form the company. It is up to them whether they wish to take that risk or not.

Jonathan Djanogly: But companies evolve. The Committee is here to produce, formulate and enhance a framework so that companies can thrive and move forward as members come in and out, not to wind up those companies.

David Jones: Does my hon. Friend share my concern about the adverse effects that entrenchment might have on the families and successors in title to the original shareholders? It is all very well for the hon. Member for Cambridge to refer to contractual obligations freely entered into, but there may be successors in title who do not have that freedom and might be adversely affected by the provision.

Jonathan Djanogly: My hon. Friend makes a fair point, as did my hon. Friend the Member for North-West Cambridgeshire when he mentioned mansion blocks. The proposals will have serious practical implications for small family-owned companies or the blocks of flats in which people live, let alone for commercial companies, and that will lead to trouble.
I simply do not accept, as the hon. Member for Cambridge suggested, that winding up would be the logical conclusion. Of course, it might be, but we want to encourage companies to sort out their problems, not wind themselves up.
The hon. Gentleman also seemed to justify the entrenchment provisions and the possible impact of undermining minority shareholders by saying that they have access to other parts of the law. He mentioned just and equitable winding-up and section 459 of the 1985 Act. It is true that those existing measures provide for the protection of minorities, but I cannot make the jump to saying that we should take away shareholders’ right to vote just because those provisions exist.
My hon. Friend the Member for Grantham and Stamford made some important points about the importance of flexibility, and the most interesting aspect was when we asked the Minister clearly to identify what led us to this clause and what happened to suggest that entrenchment should be considered. There is no interest in entrenchment, or demand for it, from large companies, small family companies or venture capital companies, but 300 CICs apparently liked the idea. I do not know how many companies we have in this country, but perhaps the Minister can advise me. Tens of thousands of commercial companies—

David Howarth: The hon. Gentleman has just defeated his own argument. If a large number of companies do not want to entrench because of the commercial consequences of doing so, the dangers he is talking about will not follow.

Jonathan Djanogly: With respect to the hon. Gentleman, that is a weak argument. The vast majority of companies respect and appreciate the framework in which they have been operating and have no wish for change. The Institute of Directors made that clear, and referred to its points earlier.
I am sure that CICs are being set up for valid charitable and voluntary objectives, and if they want certain elements in their constitution to be entrenched, that perhaps is the way we should go, but it should be a matter for CICs.
I think that the Minister agreed that CICs will have separate legislation, and they will form their own separate group as we move to consolidate the provisions. Conservative Members have argued for consolidation for three or four years, so none of us will argue against it. If the Minister wants to present arguments for entrenchment in relation to CICs, that is the place to do it.
As it happens, we shall have a formula for entrenchment that no companies seem to want, and the justifications that I have heard are very weak. I do not see how shareholder democracy will be enhanced by these provisions; indeed, quite the opposite—it will only be damaged. It might seem like a great idea to have entrenchment provisions when companies are first set up, but those companies that do will regret it, and there will be a dispute among the shareholders.

Shailesh Vara: Does my hon. Friend agree that companies that think entrenchment provisions a good idea in principle might subsequently find them barrier? A bank that is looking to give a loan might say that it is unhappy with the restrictions imposed by the constitution and might be reluctant to give the loan to assist further business.

Jonathan Djanogly: My hon. Friend makes a very good point.

It being One o’clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Four o’clock.